Managerial Economics 13th Edition by James McGuigan,Charles Moyer,Frederick Harris

Exercise 7

The Reliable Aircraft Company manufactures small, pleasure-use aircraft. Based on past experience, sales volume appears to be affected by changes in the price of the planes and by the state of the economy as measured by consumers' disposable personal income. The following data pertaining to Reliable's aircraft sales, selling prices, and consumers' personal income were collected:
TABLE

a. Estimate the arc price elasticity of demand using the 2006 and 2007 data.
b. Estimate the arc income elasticity of demand using the 2007 and 2008 data.
c. Assume that these estimates are expected to remain stable during 2009. Forecast 2009 sales for Reliable assuming that its aircraft prices remain constant at 2007 levels and that disposable personal income will increase by $40 billion. Also assume that arc income elasticity computed in (b) above is the best available estimate of income elasticity.
d. Forecast 2009 sales for Reliable given that its aircraft prices will increase by $500 from 2008 levels and that disposable personal income will increase by $40 billion. Assume that the price and income effects are independent and additive and that the arc income and price elasticities computed in parts (a) and (b) are the best available estimates of these elasticities to be used in making the forecast.