Question #2001441: Elasticity Theory

Question: Suppose that the current market price of VCR’s is $300, the average consumer has disposable income of $30,000 and the price of laser disk players (a substitute for VCR’s) is $500. Under these conditions the annual US demand for VCR’s is 5 million per year. Statistical studies have shown that for this product the own price elasticity of demand is \({{e}_{Q,P}}=-1.3\), the income elasticity of demand is \({{e}_{Q,I}}=1.7\) and the cross price elasticity of demand is \({{e}_{Q,P’}}=0.8\), where P’ is the price of laser disk players. Use this information to predict the annual number of VCR’s demanded (forget about the supply) under the following conditions:

a) Increasing competition from Korea causes VCR prices to fall to $270 with I and P’ unchanged.

b) IncoMeand tax reductions raise average disposable income to $31,500 with P and P’ unchanged.

c) Technical improvements in laser disk players cause their price to fall to $400 with P and I unchanged.

d) All the events above simultaneously.

Solution: The solution consists of 318 words (3 pages)
Deliverables: Word Document

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