Answer to Question #302979 in Microeconomics for zubayer

Question

What effect will each of the following have on the demand for small automobiles such

as the Mini-Cooper and Smart car? Answer with graph.

i. Small automobiles become more fashionable.

ii. The price of large automobiles rises (with the price of small autos remaining the

same).

iii. Income declines and small autos are an inferior good.

iv. Consumers anticipate that the price of small autos will greatly come down in the

near future.

v. The price of gasoline substantially drops.

Answer 1

i. Small automobiles become more fashionable.

The demand for small automobiles will increase. When the small automobile becomes more fashionable, most people will want the small cars. This will increase the demand for small automobiles.

ii. The price of large automobiles rises (with the price of small autos remaining the same).

The demand for small automobiles will increase. When the price of large automobiles increases, the majority of the medium earners will start buying small automobiles.

iii. Income declines and small autos are an inferior good.

The demand for small automobiles will increase. When income tends to decline, people resort to inferior goods.

iv. Consumers anticipate that the price of small autos will greatly come down in the near future.

The demand for small automobiles will reduce. People will wait for the prices to come down so that they will buy bringing demand down the demand for small cars at the moment.

v. The price of gasoline substantially drops.

It is ambiguous(increase, decrease, or increase). Because automobiles and gasoline are complementary, one might argue that lower gas costs would boost demand for all automobiles, including small ones. However, one may argue that buyers prefer small vehicles because of their fuel savings, and thus lower gas prices effectively lower the price of "gas-guzzling" substitutes. This would encourage people to switch from smaller vehicles to larger cars (SUVs), lowering the demand for small cars.