Answer to Question #208574 in Economics of Enterprise for Nawo

Question

8.1 Graphically express what effect will each of the following have on the demand for small automobiles such asthe Mini Cooper and Smart car?

I.      Small automobiles become more fashionable.

II.      The price of large automobiles rises (with the price of small autos remaining the same).

III.      Income declines and small autos are an inferior good.   (1*3=3 marks)

Answer 1

When small automobiles become more fashionable, more consumers will be willing to purchase them at all price levels. Therefore the demand of the automobiles will increase and there will be a shift in the demand curve to the right.

Large automobiles and small automobiles are substitutes. Therefore an increase in price of the former will lead to many consumers preferring purchasing the small autos and in turn their demand will increase.

Future anticipation in price reduction of small automobiles will lead to most consumers shunning buying them at the present while waiting for the price fall and in turn will result to a decrease in demand of the small automobiles