Question

Assume that the price and income elasticities of demand for luxury cars are EP = –0.52 and EY = 3.2 respectively. In the coming year, car prices are expected to decrease by 1.45 percent and income increases by 4.6 percent. Based on this information, sales of cars are expected to increase by

Answer 1

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

Given EP=-0.52 and change in price = 1.45%

-0.52 = change in quantity/1.45

Percentage change in quantity demanded = 1.45x-0.52 = -0.754(Increase)

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

Given EY=3.2 and change in income = 4.6%

3.2=change in quantity/4.6

Percentage change in quantity demanded = 4.6x3.2 = 14.72(Increase)

Net Effect = 14.72-(-0.754)

=15.474% increase in sales of cars.