You are an analyst employed by an airplane manufacturer that last year sold 40,000 ATR-72
aircrafts at $100,000 each. Your market research indicates that:
I. the price elasticity of demand for your aircrafts in −0.5. (or +0.5 in absolute value);
II. the income elasticity of demand for your aircrafts is +3.7; and
III. the cross price elasticity for your aircrafts with respect to the price of a comparable jet
manufactured by a competitor is +1.6.
A. Suppose that you expect a ceteris paribus decrease in average incomes of 10% this
year compared to last year. How many aircrafts do you estimate that your company will
sell this year? How will it impact total revenues? 6 marks
B. 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?
A.
"E(ID)=\\frac{\\Delta Q}{\\Delta I}"
"-37=\\frac{Q2-Q2}{Q2+Q1}"
"3.7=\\frac{\\Delta Q}{-10}"
"\\Delta Q=-37"
"-37=\\frac{Q2-Q2}{Q2+Q1}=\\frac{Q2-40000}{Q2+40000}"
-38Q2=-1520 000
Q2=40000
B.
"E(AB)d=\\frac{\\Delta QA}{\\Delta QB}"
"1.6=\\frac{\\Delta QA}{-4}"
"\\Delta QA=-6.4"
"-6.4=\\frac{Q2-Q2}{Q2+Q1}=\\frac{Q2-40000}{Q2+40000}"
-7.4Q2=-296000
Q2=40000
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