A1)The demand in Japan for gasoline is inelastic and therefore not very sensitive to market prices. Given that, describe the effect of each of the following on thequantity demanded or the demand for gasoline in Japan. Indicate whether the effect of each is an upward or downward movement along a given demand curve or instead involves an outward or inward shift in the demand curve for gasoline. Explain your answers.

a. A sharp increase in the average price of gasoline in Japan.

b. A sharp rise in the price of automobiles in Japan.

c. A fall in the price of public transportation in Japan.

d. A fall in the price of electic powered cars in Japan.

A2.Suppose the demand for Brand A Ice Cream is characterized by the following point elasticities: own price elasticity = -0.8 cross-price elasticity with Brand B Ice Cream = +2 income elasticity = +3 Based on the given elasticities, answer the following. Explain your answers.

a. If a firm in the industry wishes to increase total sales revenue (ignoring cost considerations), will it raise or lower its selling price? Why?

b. What happens to the demand for Brand A Ice Cream if the price of Brand B Ice Cream rises by 10%? Explain your answer.

c. What happens to the demand for Brand A Ice Cream if consumer income falls by 4%? Be specific.

d. Is Brand A Ice Cream a normal or inferior good? Explain.

A1.

a. A sharp increase in the average price of gasoline in Japan.

Explanation:

When there is an increase in the average price of gasoline, it will reduce the quantity demanded by the people and there would be upward movement along the demand curve.

b. A sharp rise in the price of automobiles in Japan.

Explanation:

Automobiles and gasoline are the complementary goods, therefore, increase in the price of automobiles will lead to decrease the demand for gasolines and as a result, demand curve will shift leftward.

c. A fall in the price of public transportation in Japan.

Explanation:

When there is a reduction in the price of public transport, people will prefer public transport than their personal vehicle due to which demand for gasoline will decrease and as a result, demand curve shift leftward.

d. A fall in the price of electric powered cars in Japan.

Explanation:

Electric car and automobiles are substitute goods. Fall in the price of electric cars will decrease the demand for automobiles and that in turn reduces the demand for gasoline. As a result, demand curve will shift leftward.

A2.

a. If a firm in the industry wishes to increase total sales revenue (ignoring cost considerations), will it raise or lower its selling price? Why?

Explanation:

Here, the elasticity of demand is negative that implies inelastic demand, therefore, when a firm wishes to increase total sales revenues, it will raise the selling price in the market.

b. What happens to the demand for Brand A Ice Cream if the price of Brand B Ice Cream rises by 10%? Explain your answer.

Explanation:

The cross elasticity of brand A and brand B is 2 therefore, 10 percent increase in the price of brand B will change the demand for brand A by 20 percent (by multiplying 2 and 10).

c. What happens to the demand for Brand A Ice Cream if consumer income falls by 4%? Be specific.

Explanation:

When income falls by 4 percent, the demand for Brand A will change to:

incomeelasticity=changeinthedemandforbrandAchangeintheconsumerincome3×−4%=12%incomeelasticity=changeinthedemandforbrandAchangeintheconsumerincome3×−4%=12%

d. Is Brand A Ice Cream a normal or inferior good? Explain.

Explanation:

Elasticity of demand for brand A is positive that is 3 therefore, brand A is a normal good.