Assume that the price and income elasticities of demand for luxury cars are EP = -0.52 and EY = 3.2 respectively. In the coming year, car prices are expected to rise by 2 percent and income by 8 percent. Based on this information, sales of cars are expected to _____.
A) fall by 0.52%
B) increase by 24.56%
C) increase by 5%
D) fall by 3.04%
E) fall by 32.84%

Question

Quizplus · Accepted Answer

The correct answer is B. The expected percentage change in quantity demanded is given by:```ΔQd/Qd = EP * ΔP/P + EY * ΔY/Y```where:* ΔQd is the change in quantity demanded* Qd is the initial quantity demanded* EP is the price elasticity of demand* ΔP is the change in price* P is the initial price* EY is the income elasticity of demand* ΔY is the change in income* Y is the initial incomePlugging in the given values, we get:```ΔQd/Qd = -0.52 * 0.02 + 3.2 * 0.08 = 0.2456```This means that sales of cars are expected to increase by 24.56%.

Assume That the Price and Income Elasticities of Demand for Luxury