Question

Suppose you work at General Motors and are in charge of predicting how many cars will be sold this year. You need to know this in advance because you have to know how many to produce. You have estimated that the current income elasticity for GM cars is 1.34. You generally know that the incomes of your consumers follows GDP fairly well. GDP is forecasted to grow at 3.2% this year.

Based on this information, what is your forecast for the percent change in cars sold this year?

Answer 1

Income elasticity of demand = % change in quantity demanded/% change in income.

If the income follows GDP and the GDP is to grow at 3.2% , this means that income of the consumers will also grow at 3.2%

And we also know that the Income elasticity of demand is 1.34.

So, the percentage change in the cars sold=

Let the percentage change be x. So,

1.34= x/3.2

x= 4.288

So the percentage change in cars sold will be 4.288%.

So there will be a growth in the cars sold by 4.288%.