Suppose that the estimated income elasticity of demand for cars is 2.5 and that the price elasticity is estimated to be -1.2. If the economy is projected to go into a mild recession with a drop in incomes of 5%, what price change would offset this expected drop in sales?

The income elasticity of demand is computed as:

And the price elasticity of demand is calculated as:

If the estimated income elasticity of demand is 2.5 and there is a decrease in incomes by 5%, then the percentage change in the quantity demanded is:

The quantity demanded will decrease by .

If the price elasticity of demand is -1.2, then the percentage change in price that would offset this change in demand (increase demand by the same percentage amount) is equal to:

The price must be decreased by 15% to offset the expected change in demand.