(Wendy) Aside:
Yawen Yang, Amanda Kombrowski, Charles Ip, Stefan Mak, Rosanne Lai Econ 101 Homework Question
Given % Change in Price: = $500/$20000 * 100% Elasticity of Car = -1.2 Price =2.5% Income Elasticity of Car = +3 Average Cost of Car = $20 000 Average Drop in Car Price = 500 $ Average Income Drop = 5% Find: % Change in Sales? Solution: % Change in Sales = Net % Change in QD % Change in QD derived from I ncome Elasticity: Income Elasticity =% Change in Q% Change in Income 3 = % Change in Q 5% % Change in Q = 3 * (5%) % Change in Q = 15% % Change in QD derived from Price Elasticity: Price Elasticity =% Change in Q% Change in Price -1.2 = % Change in Q 2.5% % Change in Q = -1.2 * (2.5%) % Change in Q = 3% (Sub in Given values) (Sub in Given values)
Net % Change in QD = = + 15% + 3% = 12% Due to the Net % Change in QD, QD will be decreased to only 88% (100% - 12%). Due to the % Change in Price (See Aside box), Price will be decreased to only 97.5% (100% - 2.5%). Since Sales of cars, or Total Revenue, is calculated by TR = P * Q We can find TR by substituting in P = 97.5% and Q = 88%. Therefore: Total Revenue = 97.5% * 88% = 85.8% The New TR will only be 85.8% of the Old TR before the price drop.
Yawen (Wendy) Yang, Amanda Kombrowski, Charles Ip, Stefan Mak, Rosanne Lai Econ 101 Homework Question
Drop in TR
= 100% - 85.8% = 14.2%
In conclusion, Sales of cars during the recession will DECREASE BY 14.2%. The $500 discount will not increase total revenue since the sales of cars will decrease by 14.2% even with the discount taken into account.