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# Studying Changes in Demand and Elasticity Coefficients

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1. The demand in Japan for new automobiles is elastic and sensitive to market prices. Given that, describe the effect of each of the following on the quantity demanded or the demand for new autos in Japan. Indicate whether the effect of each is an upward or downward movement along a given demand curve or instead involves an outward or inward shift in the demand curve for new autos. Explain your answers.

a. A decrease in the average price of new Japanese automobiles.
b. A fall in Japanese interest rates.
c. A rise in the price of public transportation in Japan.
d. A rise in the price of food in the United States.

2. Suppose the demand for beer is characterized by the following point elasticities:

own price elasticity = -2.5

cross-price elasticity with soda = +3

income elasticity = +2

a. If a firm in the industry wishes to increase total sales revenue (ignoring cost considerations), will it raise or lower its selling price? Why?
b. What happens to the demand for beer if the price of soda falls by 2%? Explain your answer.
c. What happens to the demand for beer if consumer income rises by 5%? Be specific.
d. Is beer a normal or inferior good? Explain.

#### Solution Preview

A1.

a. A decrease in the average price of new Japanese automobiles.
A decrease in average price of new Japanese automobiles will result in an increase in quantity demanded of new autos. It is represented by downward movement along a given demand curve. Since demand is elastic, percent change in increase in quantity will be higher than corresponding percent change in average prices.

b. A fall in Japanese interest rates.
A fall in Japanese interest rates will reduce the cost of using automobiles (for who buy autos on loan). Demand for new autos will increase. There will be outward shift in demand curve. ...

#### Solution Summary

There are two problems. Solution to first problem discusses the effect of various factors on demand curve for new autos. Solution to second problem illustrates the methodology to estimate the changes in demand based with the help of calculating various elasticity coefficients. 401 words with calculations displayed.

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