05 Question s points eSee page 132 After graduating from col

05 Question (s points) eSee page 132 After graduating from college, you are hired by the Ford automobile company as an economic analyst. For your first project, you are asked to estimate what would happen to the sales of Ford Mustangs as a result of a change in () the price of a Chevrolet Camaro, () the price of gasoline, and (ii) consumer incomes. You are given the following elasticities: Price elasticity of demand for Ford Mustangs-2.5 Cross-price elasticity between Ford Mustangs and Camaros- 1.5 Cross-price elasticity between Ford Mustangs and gasoline =-0.80 Income elasticity of demand for Ford Mustangs 3.00

Solution

Answer1:-

Cross Elasticity of Demand E_A,B =

% increase in quantity demanded of A

% increase in price of product B

1.5=Change in Quantity demanded /10

Change in quantity demanded = 1.5*(-10) =- 15%

So sales of Mustang will fall by 15%

Answer 2:-

Cross Elasticity of Demand E_A,B =

% increase in quantity demanded of A

% increase in price of product B

-0.8 =% increase in quantity demanded of A /20

Change in Ford Mustang Quantity demanded =-0.8*20 = -1.6%

So the demand will fall by 1.6%

Answer 3:- Income elasticity = %change in quantity demanded / % change in income

3=%change in quantity demanded / 5

%change in quantity demanded =15

So there will be an increase in the quantity demanded by 15%

Cross Elasticity of Demand EA,B =	% increase in quantity demanded of A
% increase in price of product B