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ECON-314-03/04, 10/5/10 Answers to Practice Questions 1. When , 20 P A = , 20 P C = and 3 P G = , the quantity of Accord demanded equals Q = 400. (i) The price elasticity of demand for Accord is 5 . 0 400 20 ) 10 ( Q P P Q A P - = × - = = ε . That is, when the price of Honda Accord increases by 1% and all else are held constant, the quantity demanded for Accord drops by 0.5%. The price elasticity of demand for Accord is inelastic. (ii) The cross-price elasticity of demand of Accord with respect to the price of Toyota Camry is 5 . 0 400 20 10 Q P P Q C C C = × = = ε . That is, when the price of Toyota Camry increases by 1% and all else are held constant, the quantity demanded for Accord increases by 0.5%. Because the cross-price elasticity is positive, Honda Accord and Toyota Camry are substitutes. (iii) The cross-price elasticity of demand of Accord with respect to the gasoline price is 075 . 0 400 3 ) 10 ( Q P P Q G G G - = × - = = ε . That is, when the price of gasoline increases by 1% and all else are held constant, the quantity demanded for Accord decreases by 0.075%.

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