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1. Sales of cars declined by 15 per cent in a recent recession. During this period the price of cars rose by 6 per cent, average income fell by 4 per cent and the price of petrol rose by 20 per cent. It has been estimated that the PED for cars is 0.8 and the YED is 1.25.a. Estimate the effect of the decline in income on car sales.b. Estimate the effect of the car price rise on sales.c. Estimate the CED between petrol and cars; compare your estimate using simple elasticities and additive effects with the estimate obtained using a power form of demand equation.2. MK Corp estimates that its demand function is as follows:Q 400 12:5P 25A 14Y 10Pwhere Q is the quantity demanded per month, P is the products price (in \$), A is the firms advertising expenditure (in \$000 per month), Y is per capita disposable income (in \$000), and P * is the price of AJ Corp.a. During the next five years, per capita disposable income is expected to increase by \$5,000 and AJ is expected to increase its price by \$12. What effect will this have on the firms sales volume?b. If MK wants to change its price by enough to offset the above effects, by how much must it do so?c. Compare the profitability of maintaining sales volume by either changing price or changing advertising spending.d. If MKs current price is \$60 and it spends \$10,000 per month on advertising, while per capita income is \$25,000 and AJs price is \$70, calculate the price elasticity of demand with the price change.e. What can be said about the effect of the above price change on profit?f. What can be said about the relationship between the products of MK and AJ?
1. Sales of cars declined by 15 per cent in a recent recession. During this period the price of cars rose by 6 per cent, average income fell by 4 per cent and the price of petrol rose by 20 per cent. It has been estimated that the PED for cars is 0.8 and the YED is 1.25. a. The effect of the decline in income on car sales is estimated by YED or income elasticity of demand. Given that YED is 1.25 and average income fell by 4 per cent, it must be the case that car sales registered a fall of 5 percent due to income factor. b. The effect of the car price rise on sales is estimated by PED. Given that PED is 0.8 and car prices rises by 6 percent, it must be the case that car sales registered a fall of 4.8 percent due to its own price. c. The CED between petrol and cars can be estimated by the ratio of percentage fall in car sales to percentage rise in petrol prices. This implies that CED is 15/20 or 0.75. 2. MK Corp estimates that its demand function is as follows: Q = 400…

h; 12.5P + 25A + 14Y + 10P* where Q is the quantity demanded per month, P is the products price (in \$), A is the firms advertising expenditure (in \$000 per month), Y is per capita disposable income (in \$000), and P * is the price of AJ Corp. a. During the next five years, per capita disposable income is expected to increase by \$5,000 and AJ is expected to increase its price by \$12. When that happens, the new demand function faced by the firm will be: Q1 = 400 12.5P + 25A + 14(Y +5,000) + 10(P*+12). Since both factors are positively related to the demand faced by the firm, these two events will increase the sales volume of MJ corp.

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