Question

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 mark

Answer 1

$E(ID)=\frac{\Delta Quantity}{\Delta Income}$

$\frac{Quantity2 - Quantity2}{Quantity2+Quantity1} = -37$

$\frac{\Delta Quantity}{-10} = 3.7$

$\Delta Quantity2=-37$

$-37=\frac{Quantity2-Quantity2}{QQuantity2+QQuantity2}\\ =\frac{Quantity22-40000}{Quantity22+40000}$

$-38Quantity2=-1520 000$

$Quantity2=40000\\ Quanitity2=40000$