DISPOSABLE PERSONAL INCOME (IN CONSTANT 2006 DOLLARS– BILLIONS) AIRCRAFT AVERAGE YEAR SALES PRICE ($) 2006 525 17,200 610 2007 450 8,000 610 2008 400 8,000 590
The Reliable Aircraft Company manufactures small, pleasure-use aircraft. Based on past experience, sales volume appears to be affected by changes in the
a. Estimate the arc price elasticity of
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.
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.
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