Assume that the price and income elasticities of demand for luxury cars are EpEp = -1.03 and EyEy = 2.7, respectively. In the coming year, car prices are expected to rise by 1.8 percent and income by 7 percent. Based on this information, sales of cares are expected to do what? Explain.

Given:

Price Elasticity of the car = -1.03

Percentage change in price of the car = 1.8

Price Elasticity = Percentage change in quantity demanded/ Percentage change in price.

Putting the value of percentage change in price and elasticity in the formula we have,

-1.03 = Percentage change in quantity demanded/ 1.8

Percentage change in quantity demanded = 1.8 * -1.03

Percentage change in quantity demanded = - 1.854

Given:

Income Elasticity of the car = 2.7

Percentage change in income of consumer = 7

Income Elasticity = Percentage change in quantity demanded/ Percentage change in Income

Putting the value of percentage change in income and elasticity in the formula we have,

-2.7 = Percentage change in quantity demanded/ 7

Percentage change in quantity demanded = 2.7 * 7

Percentage change in quantity demanded = 18.9

So from the above calculations we see that, the increase in price by 1.8% has lead to decrease in quantity demanded by 1.854 % . Whereas, percentage increase of 7 percent in price has resulted in 18.9% increase in quantity demanded. So since the magnitude of percentage increase in quantity demanded due to income change is much greater than the magnitude of percentage decrease in quantity demanded due to price, hence the quantity demanded of the car will increase. Thus the sales of the car is likely to increase.