Question

The cross-price elasticity between two products is estimated to be 3. If the price of the first product is decreased by 3.9%, demand for the second product will change by_____%.

Hint: Round to the second decimal. Answers are in percentages and can be positive or negative. If you calculate .0151 then input the answer as 1.51.

Assume that the price and income elasticities of demand for luxury cars are E_P = –0.52 and E_Y = 3.2 respectively. In the coming year, car prices are expected to decrease by 1.34 percent and income increases by 8.7 percent. Based on this information, sales of cars are expected to increase by_____%.

Hint: Round to the second decimal. Answers are in percentages, if you calculate .0151 then input the answer as 1.51.

Answer 1

Answer:

1]

Cross-price elasticity of demand = change in quantity of one product /change in the price of other product)

3=change in quantity of second product / (-3.9)

Change in a quantity of second product = -3.9 * 3 = -11.7%

Thus the demand decreases by 11.7%

Demand for the second product will change by 11.7%.

2]

Ep = -0.52

Ey = 3.2

Percentage decrease in Car Prices = 1.34%

Percentage rise in Income = 8.7%

Price elasticity = percentage change in quantity/percentage change in price

Given EP=-0.52 and change in price = 1.34%

-0.52 = change in quantity/1.34

Percentage change in quantity demanded = 1.34x-0.52 = -0.6968(Decrease)

Income elasticity = percentage change in quantity/percentage change in income

Given EY=3.2 and change in income = 8.7%

3.2=change in quantity/8.7

Percentage change in quantity demanded = 8.7x3.2 = 27.84(Increase)

Net Effect = 27.84 – (-0.6968)

=28.5368% increase in sales of cars.