1. Answer the following questions about the elasticities for new domestic cars if the estimated demand function is represented by Q NA=-500PNA + 250Px + 125M -100,000,000R + 20,000 Pop + 600A, and where Q'NA is quantity demanded of new domestic cars, PNA is the average price of new domestic cars, Px is the average price of new import luxury cars, M is average annual household income, R is the average interest rate (in decimal format), Pop is the population (in millions), and A is the annual dollars spent on advertising on new cars (in millions). Recall that the new domestic cars Q NA = 5.5 million when PNA = $35,000, Px = $60,000, M = $56,000, R=8%, Pop =300 million, and A = $5,000 million. a. What is the own price elasticity of demand for new domestic cars if PNA = $35,000 Px = $60,000, M=$56,000, R = 8%, Pop =300 million, and A = $5,000 million? b. Is the demand for new domestic cars elastic, inelastic, or unit elastic at this price and values of other variables? Explain. C. Based on your answers to a and b, if the price of automobiles was increased to $36,500. would an economist expect for total revenues to increase or decrease? Explain. d. What is the cross-price elasticity of demand for new domestic cars and imported luxury cars at these values? e. Based on your answer to d, are the two vehicles substitutes or complements? Explain. Is the response elastic or inelastic? f. What is the income elasticity for new domestic cars at these values? g. Based on your answer to f, are new domestic cars inferior goods, normal goods, necessities and/or luxuries? h. What is the advertising elasticity for new domestic cars at these values? values?
1. Answer the following questions about the elasticities for new domestic cars if the estimated demand function is represented by Q NA=-500PNA + 250Px + 125M -100,000,000R + 20,000 Pop + 600A, and where Q'NA is quantity demanded of new domestic cars, PNA is the average price of new domestic cars, Px is the average price of new import luxury cars, M is average annual household income, R is the average interest rate (in decimal format), Pop is the population (in millions), and A is the annual dollars spent on advertising on new cars (in millions). Recall that the new domestic cars Q NA = 5.5 million when PNA = $35,000, Px = $60,000, M = $56,000, R=8%, Pop =300 million, and A = $5,000 million. a. What is the own price elasticity of demand for new domestic cars if PNA = $35,000 Px = $60,000, M=$56,000, R = 8%, Pop =300 million, and A = $5,000 million? b. Is the demand for new domestic cars elastic, inelastic, or unit elastic at this price and values of other variables? Explain. C. Based on your answers to a and b, if the price of automobiles was increased to $36,500. would an economist expect for total revenues to increase or decrease? Explain. d. What is the cross-price elasticity of demand for new domestic cars and imported luxury cars at these values? e. Based on your answer to d, are the two vehicles substitutes or complements? Explain. Is the response elastic or inelastic? f. What is the income elasticity for new domestic cars at these values? g. Based on your answer to f, are new domestic cars inferior goods, normal goods, necessities and/or luxuries? h. What is the advertising elasticity for new domestic cars at these values? values?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:1. Answer the following questions about the elasticities for new domestic cars if the estimated
demand function is represented by
Q NA=-500PNA + 250Px + 125M -100,000,000R + 20,000 Pop + 600A, and where Q'NA is
quantity demanded of new domestic cars, PNA is the average price of new domestic cars, Px is
the average price of new import luxury cars, M is average annual household income, R is the
average interest rate (in decimal format), Pop is the population (in millions), and A is the annual
dollars spent on advertising on new cars (in millions).
Recall that the new domestic cars Q NA = 5.5 million when PNA = $35,000, Px = $60,000, M =
$56,000, R=8%, Pop =300 million, and A = $5,000 million.
a. What is the own price elasticity of demand for new domestic cars if PNA = $35,000 Px =
$60,000, M=$56,000, R = 8%, Pop =300 million, and A = $5,000 million?
b. Is the demand for new domestic cars elastic, inelastic, or unit elastic at this price and
values of other variables? Explain.
C.
Based on your answers to a and b, if the price of automobiles was increased to $36,500.
would an economist expect for total revenues to increase or decrease? Explain.
d. What is the cross-price elasticity of demand for new domestic cars and imported luxury
cars at these values?
e. Based on your answer to d, are the two vehicles substitutes or complements? Explain.
Is the response elastic or inelastic?
f. What is the income elasticity for new domestic cars at these values?
g. Based on your answer to f, are new domestic cars inferior goods, normal goods,
necessities and/or luxuries?
h. What is the advertising elasticity for new domestic cars at these values?
values?
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