Question

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

Mini-Cooper and Smart car? Write down the mechanism and also plot the graphs for each

case if necessary.

a. The price of small automobiles substantially drops.

b. Big automobiles become less fashionable

c. The price of small automobiles rises (with the price of big autos remaining the same).

d. Income increases and small autos are normal good.

e. Consumers anticipate that the price of small autos will not change in the near future.

Answer 1

a. The price of small automobiles substantially drops, so the demand will increase.

b. Big automobiles become less fashionable, so the demand for small cars will increase.

c. The price of small automobiles rises (with the price of big autos remaining the same), so the demand for small cars will decrease.

d. Income increases and small autos are normal good, so the demand for small cars will increase.

e. Consumers anticipate that the price of small autos will not change in the near future, so there will be no change in demand for small cars.