Answer to Question #74596 in Microeconomics for Esther

Question

A researcher estimated that PED for motor vehicles in a country is -1.2 while income elasticity is 3.0. Next year the automobile makers intend to increase average price of motor vehicles by 5% and expect consumer income to increase by 3%

a. If sales of the vehicles are 10million this year. How many do you expect the automaker to sell next year?

b. By how much should the automakers increase the price of motor vehicles if they wish to increase sales by 5% next year?

Answer 1

PED = -1.2 Ei = 3.0. Price of motor vehicles increases by 5%, income increases by 3%.
a. If sales of the vehicles are 10 million this year, then we expect the automaker to sell 5%*1.2 = 6% more or 10.6 million next year.
b. If the automakers wish to increase sales by 5% next year, then they should increase the price of motor vehicles by 5%/1.2 = 4.17%.