ARE100AFA11HW1KEY

ARE100AFA11HW1KEY - 1 Managerial Economics(ARE 100A...

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1 Managerial Economics (ARE) 100A University of California, Davis Spring Quarter, 2011 Instructor: John H. Constantine KEY —Homework 1: Due Friday September 30, 2011 Problem 1 : What effect will each of the following have on the demand for small automobiles such as the Mini Cooper and Smart car? (a) Small automobiles become more fashionable. (b) The price of large automobiles rises (with the price of small autos remaining the same). (c) Income declines and small autos are an inferior good. (d) Consumers anticipate the price of small autos will greatly come down in the near future. (e) The price of gasoline substantially drops. Demand increases in (a), (b), and (c). Demand decreases in (d). The last one (e) is ambiguous. As autos and gas are complements, one could argue that the decrease in gas prices would stimulate demand for all cars, including small ones. However, one could also argue that small cars are attractive to consumers because of fuel efficiency, and that a decrease in gas prices effectively reduces the price of the “gas guzzling” substitutes. That would encourage
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ARE100AFA11HW1KEY - 1 Managerial Economics(ARE 100A...

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