To explain:
Whether the
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.
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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