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Chapter 6: Problem 1

Do you think the price elasticity of demand for Ford sport-utility vehicles (SUVs) will increase, decrease, or remain the same when each of the following events occurs? Explain your answer. a. Other car manufacturers, such as General Motors, decide to make and sell SUVs. b. SUVs produced in foreign countries are banned from the American market. c. Due to ad campaigns, Americans believe that SUVs are much safer than ordinary passenger cars. d. The time period over which you measure the elasticity lengthens. During that longer time, new models such as four-wheel-drive cargo vans appear.

Short Answer

Expert verified
a. Other car manufacturers start producing SUVs b. Banning foreign SUVs from the American market c. Americans believe SUVs are safer due to ad campaigns d. Time period over which elasticity is measured lengthens

Step by step solution

01

a. Other car manufacturers start producing SUVs

When other car manufacturers like General Motors start producing and selling SUVs, it means that the competition in the market has increased. With more substitutes available in the market, the demand for Ford's SUVs will become more elastic. This is because customers have more options to choose from and are more likely to switch to other brands if Ford changes its SUVs' prices. So, the price elasticity of demand will increase.
02

b. Banning foreign SUVs from the American market

If SUVs produced in foreign countries are banned from the American market, it will reduce the number of alternatives available for customers. This will make the demand for Ford's domestically produced SUVs less elastic, as there are fewer substitutes available for customers to switch to in case of a price change. Consequently, the price elasticity of demand will decrease.
03

c. Americans believe SUVs are safer due to ad campaigns

As ad campaigns make Americans believe that SUVs are much safer than ordinary passenger cars, the preference for SUVs will increase. This means that the demand for SUVs will rise. However, this does not have a direct impact on the price elasticity of demand as it depends on how easily consumers can switch to other substitutes. Nevertheless, if Ford is perceived as a safer option compared to its competitors, then the demand for Ford's SUVs might become less elastic. In this case, the price elasticity of demand could decrease; however, we do not have enough information to make a definitive conclusion.
04

d. Time period over which elasticity is measured lengthens

During a longer time period, new models such as four-wheel-drive cargo vans appear. This increases the number of options and substitutes available for consumers. As the range of available alternatives increases, customers are more likely to switch to other brands or models when the price of Ford's SUVs changes. Consequently, as the time period over which the elasticity is measured lengthens, the price elasticity of demand for Ford SUVs will likely increase.

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Most popular questions from this chapter

Use an elasticity concept to explain each of the following observations. a. During economic booms, the number of new personal care businesses, such as gyms and tanning salons, is proportionately greater than the number of other new businesses, such as grocery stores. b. Cement is the primary building material in Mexico. After new technology makes cement cheaper to produce, the supply curve for the Mexican cement industry becomes relatively flatter. c. Some goods that were once considered luxuries, like a telephone, are now considered virtual necessities. As a result, the demand curve for telephone services has become steeper over time. d. Consumers in a less developed country like Guatemala spend proportionately more of their income on equipment for producing things at home, like sewing machines, than consumers in a more developed country like Canada.

A recent report by the U.S. Centers for Disease Control and Prevention (CDC), published in the CDC's Morbidity and Mortality Weekly Report, studied the effect of an increase in the price of beer on the incidence of new cases of sexually transmitted disease in young adults. In particular, the researchers analyzed the responsiveness of gonorrhea cases to a tax-induced increase in the price of beer. The report concluded that "the.... analysis suggested that a beer tax increase of \(\$ 0.20\) per six-pack could reduce overall gonorrhea rates by \(8.9 \% . "\) Assume that a sixpack costs \(\$ 5.90\) before the price increase. Use the midpoint method to determine the percent increase in the price of a six-pack, and then calculate the cross-price elasticity of demand between beer and incidence of gonorrhea. According to your estimate of this cross-price elasticity of demand, are beer and gonorrhea complements or substitutes?

In each of the following cases, do you think the price elasticity of supply is (i) perfectly elastic; (ii) perfectly inelastic; (iii) elastic, but not perfectly elastic; or (iv) inelastic, but not perfectly inelastic? Explain using a diagram. a. An increase in demand this summer for luxury cruises leads to a huge jump in the sales price of a cabin on the Queen Mary 2 . b. The price of a kilowatt of electricity is the same during periods of high electricity demand as during periods of low electricity demand. c. Fewer people want to fly during February than during any other month. The airlines cancel about \(10 \%\) of their flights as ticket prices fall about $20 \%$ during this month. d. Owners of vacation homes in Maine rent them out during the summer. Due to the soft economy this year, a \(30 \%\) decline in the price of a vacation rental leads more than half of homeowners to occupy their vacation homes themselves during the summer.

The accompanying table gives part of the supply schedule for personal computers in the United States. $$ \begin{array}{c|c} \text { Price of computer } & \text { Quantity of computers supplied } \\\ \$ 1,100 & 12,000 \\\ 900 & 8,000 \end{array} $$ a. Calculate the price elasticity of supply when the price increases from $\$ 900\( to \)\$ 1,100$ using the midpoint method. Is it elastic, inelastic or unit-elastic? b. Suppose firms produce 1,000 more computers at any given price due to improved technology. As price increases from \(\$ 900\) to \(\$ 1,100\), is the price elasticity of supply now greater than, less than, or the same as it was in part a? c. Suppose a longer time period under consideration means that the quantity supplied at any given price is \(20 \%\) higher than the figures given in the table. As price increases from \(\$ 900\) to \(\$ 1,100,\) is the price elasticity of supply now greater than, less than, or the same as it was in part a?

A recent study determined the following elasticities for Volkswagen Beetles: Price elasticity of demand \(=2\) Income elasticity of demand \(=1.5\) The supply of Beetles is elastic. Based on this information, are the following statements true or false? Explain your reasoning. a. A \(10 \%\) increase in the price of a Beetle will reduce the quantity demanded by \(20 \%\). b. An increase in consumer income will increase the price and quantity of Beetles sold.
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