Essentials of Economics
Essentials of Economics
4th Edition
ISBN: 9781464186653
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
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Chapter 5, Problem 1P
To determine

To explain:

Whether the price elasticity of demand for ford SUVs will increase, decrease or remain the same when each of following events occurs.

Concept Introduction:

Price Elasticity of Demand: Price elasticity of demand stands for the change in the quantity demanded due to the change in the price of a good or service. If a small change in price causes a large change in quantity, then the good or service is said to be elastic. If a change in price causes little or no change in quantity, then the good or service is said to be inelastic.

Expert Solution & Answer
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Explanation of Solution

(a) Other car manufacturers decide to make and sell car S.

  • The price elasticity of demand for Company F’s car S will increase if the other car manufacturers decide to make and sell car S.
  • This is because buyers will have a substitute to Company F cars and as a result the price elasticity of demand will increase.

Conclusion:

The elasticity will increase.

(b) Car S produced in foreign countries are banned from markets.

  • The price elasticity of demand for Company F’s car S will decrease if the car S produced in foreign countries is banned from the market.
  • This is because buyers will not have a substitute to Company F cars and as a result the price elasticity of demand will decrease.

Conclusion:

The elasticity will decrease.

(c) Car S much safer than ordinary passenger cars.

  • The price elasticity of demand for Company F’s car S will decrease if car S is believed to be much safer than ordinary passenger cars.
  • This is because buyers will believe that there are no close substitutes to Company F’s car S and as a result the price elasticity of demand will decrease.

Conclusion:

The elasticity will decrease.

(d) New models such as four-wheel drive cargo vans appear.

  • The price elasticity of demand for Company F’s car S will increase if there are new models available over time.
  • This is because buyers will have substitutes to Company F’s car S and the demand of car S will decrease. As a result, the price elasticity of demand will increase because the change in quantity is larger than the change in price.

Conclusion:

The elasticity will increase.

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How To Understand Elasticity (Economics); Author: Market Power;https://www.youtube.com/watch?v=1XXhpHJTglg;License: Standard Youtube License