Suppose that the current market price of VCRs is $300, that average consumer disposable income is $30,000, and that the price of DVD players (a substitute for VCRs) is $500. Under these conditions annual U.S. demand for VCRs is 5 million per year. Statistical studies have shown that for VCRs the own-price elasticity of demand is -1.3. The income elasticity of demand for VCRs is 1.7. The cross-price elasticity of demand for VCRs with respect to DVDs is 0.75. Use this information to predict the annual number of VCRs sold if increasing competition from Asia causes VCR prices to fall by 10% with income and the price of DVDs is unchanged.
Change in VCR Prices=-10%
Own price elasticity of ...
Solution calculates annual number of VCRs sold following a price reduction.