PROBLEM (5) Cars (x) is a normal good, and public transportation (y) is a substitute for cars. The demand for cars(x) is given by where Qp = 20 ± px ± py ± p{uture ±I where px is the price of cars, Py is the price of public transportation, puture is the expected future price of cars and I is the average income level. (a) Decide whether a plus (+) or a minus (-) sign is appropriate for each “t" in the demand equation above. (b) Does the demand become more or less elastic (at a given px) as py increases? (c) Calculate the cross price elasticity of demand (for cars with respect to the price of public transportation Py) at the point I= 10, Py = 5, py = 2, pfuture = 1
PROBLEM (5) Cars (x) is a normal good, and public transportation (y) is a substitute for cars. The demand for cars(x) is given by where Qp = 20 ± px ± py ± p{uture ±I where px is the price of cars, Py is the price of public transportation, puture is the expected future price of cars and I is the average income level. (a) Decide whether a plus (+) or a minus (-) sign is appropriate for each “t" in the demand equation above. (b) Does the demand become more or less elastic (at a given px) as py increases? (c) Calculate the cross price elasticity of demand (for cars with respect to the price of public transportation Py) at the point I= 10, Py = 5, py = 2, pfuture = 1
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.8P
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Transcribed Image Text:PROBLEM (5) Cars (x) is a normal good, and public transportation (y) is a substitute for cars. The demand for
cars(x) is given by where QD
where px
= 20 ± px
± Py ± puture +I
is the price of cars, py is the price of public transportation, pture is the expected future price of cars
and I is the average income level.
(a) Decide whether a plus (+) or a minus (-) sign is appropriate for each “±" in the demand equation above.
(b) Does the demand become more or less elastic (at a given px) as py increases?
(c) Calculate the cross price elasticity of demand (for cars with respect to the price of public transportation p,)
at the point I = 10, px
(d) If the point in (c) is the market equilibrium point where the supply is known to have constant price
elasticity with E = 2 at any point on the curve, derive the supply function.
= 5, py = 2, puture = 1
2, рх
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