Suppose that the current market price of VCRs is $300, that the average consumer disposable income...

Suppose that the current market price of VCRs is $300, that the average consumer disposable income is $30,000, and that the price of DVDs (a substitute for VCRs) is $500. Under these conditions annual U.S. demand for VCRs is 5 million per year. Statistical studies have shown that for VCRs the own-price elasticity of demand is –1.3. The income elasticity of demand for VCRs is 1.7. The cross-price elasticity of demand for VCRs with respect to DVDs is 0.8.

Use this information to predict the annual number of VCRs sold under the following conditions:

(a) Increasing competition from Asia causes VCR prices to fall to $270 with income and the price of

DVDs is unchanged.

(b) Income tax reductions raise average disposable personal income to $31,500 with prices unchanged.

(Do not use $31.5 for $31,5000!)

(c) An inventor in Menlo Park invents a cheaper way to produce DVDs, reducing the price of a DVD to

$400, with the price of VCRs and income unchanged.

(d) All of the events described in parts (a)-(c) occur simultaneously.

Expert Solution

Rahul Sunny answered 1 year ago

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