question archive Assume the price and income elasticities of demand for cars are EpEp = -0
Assume the price and income elasticities of demand for cars are EpEp = -0
Subject:EconomicsPrice:2.88 Bought3
Assume the price and income elasticities of demand for cars are EpEp = -0.52 and EyEy = 3.2. In the coming year, car prices are expected to rise by 2% and income by 8%. Based on this information, the cars' sale volume is expected to:
a) fall by 0.52%.
b) increase by 24.56%.
c) increase by 5%.
d) fall by 3.04%.
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Answer: B
To find out how much volume changes, we need to find the effect of the price and income change separately first. The impact of a 2% rise in prices at a -0.52 price elasticity of demand is 2*-0.52=-1.04%. The impact of a 8% rise in income at a 3.2 income elasticity of demand is 8*3.2=25.6%. Thus, the total change is 25.6-1.04=24.56%.
