Answer to Question #272669 in Microeconomics for ash

Question

Assume now that you do not think incomes will change, but that you expect your

competitor will decrease his price by 4%. Assuming that your company does not change

the price of its aircrafts, how many would you expect your company will sell this year?

Answer 1

Solution:

The company's sales will decrease massively.

This is because aircraft are elastic products and any small percentage change in price will result in a bigger percentage change in quantity demanded. Therefore, a substitution effect will take place, and consumers will substitute my more expensive aircraft for my competitor’s cheaper aircraft. As a result, aircraft sales will decline as the company will lose more customers to its competitor, whose sales will increase massively.