Answer to Question #165436 in Microeconomics for Prathiksha

Question

Assume that the price of a new model of car in is ₹4,60,000 and 90,000 cars are sold at this price in a year. If the price elasticity of demand of new car is 1.7, what will be the effect on annual sales when the average price of new model declines to ₹4,15,000?

Answer 1

Price =460,000

Quantity =90,000 cars

Price Elasticity =1.7(showing that the product is elastic)

New Price =415,000

Reduction is Price =$460,000-415,000=45,000$

Percentage reduction in Price =$\frac{45,000}{460,000}×100=9.78\%$

Percentage reduction in Price =9.78%

$Price Elasticity =\frac{\% \Delta Quantity} {\%\Delta Price}$

$=1.7=\frac{\% \Delta Quantity} {9.78}$

% change in quantity =1.7×9.78=16.63%

Thus the quantity demanded for the cars increased by 16.63%;

If 100%=90,000 cars

116.63%=?

=$\frac{116.63×90,000}{100}$ =104,967 cars.

Therefore, the annual sales will increase from 90,000 cars to 104,967cars since the average price declined, leading to increase in the quantity of cars demanded.