Question

Bloomberg reports Mercedes-Benz, a German automaker, will begin producing electric vehicles at its Alabama (U.S.) factory. Ceteris paribus, what will happen to the price elasticity of demand (in absolute value) for Tesla electric cars?

A. Increase.

B. Decrease.

C. Either increase or decrease.

D. Not change.

E. None of the abov

Answer 1

Answer: The price elasticity of demand (in absolute value) will increase=A.

Explanation: Mercedes-Benz starts producing electric vehicles in its US factory. This means there will be another electric vehicle supplier in the US market apart from Tesla. So, the consumers in US have a choice between the two which implies that the electric vehicle produced by Mercedes-Benz in Alabama and electric cars of Tesla are substitutes. Since, there are more substitutes in the market it is easier for consumers to switch between the two available substitutes. Therefore, the price elasticity of demand (in absolute value) for Tesla electric cars will increase that is it will become more elastic.