Answer to Question #123329 in Microeconomics for ayusha habib

Question

What effect will each of the following have on the demand for small automobiles such as the
Mini-Cooper and Smart car? Write down the mechanism and also plot the graphs for each
case if necessary.
a. The price of small automobiles substantially drops.
b. Big automobiles become less fashionable
c. The price of small automobiles rises (with the price of big autos remaining the same).
d. Income increases and small autos are normal good.
e. Consumers anticipate that the price of small autos will not change in the near future.

Answer 1

a. The price of small automobiles substantially drops.

A decrease in price leads to a movement along the demand curve. Thus, a decrease in the price of small automobiles will cause a downward movement along the demand curve, meaning that the quantity demanded for small automobiles will increase.

b. Big automobiles become less fashionable

If automobiles become less fashionable, people will prefer less of them. This will increase the demand for small automobiles, causing the demand curve to shift to the right.

c. The price of small automobiles rises (with the price of big autos remaining the same).

An increase in price leads to a movement along the demand curve. Thus, an increase in the price of small automobiles will cause an upward movement along the demand curve, meaning that the demand for small automobiles will decrease.

d. Income increases and small autos are normal good.

For normal goods, an increase in income increases their demand. Thus, an increase in income will shift the demand curve for small autos to the right.

e. Consumers anticipate that the price of small autos will not change in the near future.

If the consumers expect no change in the price of small automobiles, this means that they will not change their current demand for small automobiles. Thus, their demand will remain the same.