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To explain:
Whether the
Concept Introduction:
Price Elasticity of Demand: Price elasticity of demand stands for the change in the quantity demanded due to the change in the price of a good or service. If a small change in price causes a large change in quantity, then the good or service is said to be elastic. If a change in price causes little or no change in quantity, then the good or service is said to be inelastic.
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Explanation of Solution
(a) Other car manufacturers decide to make and sell car S.
- The price elasticity of demand for Company F’s car S will increase if the other car manufacturers decide to make and sell car S.
- This is because buyers will have a substitute to Company F cars and as a result the price elasticity of demand will increase.
Conclusion:
The elasticity will increase.
(b) Car S produced in foreign countries are banned from markets.
- The price elasticity of demand for Company F’s car S will decrease if the car S produced in foreign countries is banned from the market.
- This is because buyers will not have a substitute to Company F cars and as a result the price elasticity of demand will decrease.
Conclusion:
The elasticity will decrease.
(c) Car S much safer than ordinary passenger cars.
- The price elasticity of demand for Company F’s car S will decrease if car S is believed to be much safer than ordinary passenger cars.
- This is because buyers will believe that there are no close substitutes to Company F’s car S and as a result the price elasticity of demand will decrease.
Conclusion:
The elasticity will decrease.
(d) New models such as four-wheel drive cargo vans appear.
- The price elasticity of demand for Company F’s car S will increase if there are new models available over time.
- This is because buyers will have substitutes to Company F’s car S and the demand of car S will decrease. As a result, the price elasticity of demand will increase because the change in quantity is larger than the change in price.
Conclusion:
The elasticity will increase.
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EBK ESSENTIALS OF ECONOMICS
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