It is estimated that a 3 percent drop in the price of Asian and European cars will decrease the demand for American cars by 0.84 percent. From this information one can conclude that:
A) the income elasticity of demand for American cars is less than 1.
B) European and Asian cars are luxuries.
C) European and Asian cars are substitutes for American cars.
D) European and Asian cars are complements for American cars.

Question

Quizplus · Accepted Answer

The decrease in demand for American cars when the price of Asian and European cars drops indicates that these cars are substitutes. When the price of substitutes decreases, the demand for the original product typically decreases as well.

It Is Estimated That a 3 Percent Drop in the Price