A recent study determined the following elasticities for...

A recent study determined the following elasticities for Volkswagen Beetles: Price elasticity of demand $=2$ Income elasticity of demand $=1.5$ The supply of Beetles is elastic. Based on this information, are the following statements true or false? Explain your reasoning. a. A $10 \%$ increase in the price of a Beetle will reduce the quantity demanded by $20 \%$. b. An increase in consumer income will increase the price and quantity of Beetles sold.

A recent study determined the following elasticities for Volkswagen Beetles: Price elasticity of demand $=2$ Income elasticity of demand $=1.5$ The supply of Beetles is elastic. Based on this information, are the following statements true or false? Explain your reasoning.
a. A $10 \%$ increase in the price of a Beetle will reduce the quantity demanded by $20 \%$.
b. An increase in consumer income will increase the price and quantity of Beetles sold.

Key Concepts

Price Elasticity of Demand

This concept measures the responsiveness of the quantity demanded of a good to a change in its price. A higher elasticity indicates that consumers react strongly to price changes, meaning a change in price results in a proportionately larger change in the quantity demanded.

Income Elasticity of Demand

Income elasticity of demand quantifies how the quantity demanded of a good changes as consumer incomes change. For normal goods, a positive income elasticity indicates that an increase in income leads to an increase in demand, and the magnitude shows the sensitivity of the demand to income changes.

Supply Elasticity

Supply elasticity refers to how much the quantity supplied of a good responds to changes in its price. When supply is elastic, producers can increase output significantly in response to an increase in price, or reduce it when prices fall, which affects market equilibrium and pricing outcomes.

Market Equilibrium Adjustments

Market equilibrium adjustments occur when shifts in demand or supply lead to new market outcomes, affecting both price and quantity. For instance, when demand increases due to higher income and the supply is elastic, the resulting adjustments will typically see both the equilibrium price and quantity increase as the market finds a new balance.

Transcript

00:01 This case we are going to study how the price and quantity are affected by the elasticity of demand that is percentage change in price will result in percentage change in quantity demanded and from this we are able to get the elasticity and similarly increase in income increases the demand for normal good and through this we can also calculate the income elasticity of demand which is equal to percentage change in quantity demanded divided by percentage change in income first question it says that a 10 % increase in the price of the battle beetle will reduce the quantity demanded by 20%.

00:38 Now if we calculate elasticity, what we get a certain change in quantity demanded divided by percentage change in price.

00:45 What is the percentage change in quantity demanded? so it is 20%.

00:49 And what is the percentage change in price? it is 10 % means a 10 % increase in price of the beetle will result in 20 % reduction in quantity demanded and if we divide it we get two so here it is given price elasticity of demand is two so our first answer is correct because price elasticity of demand has come to be two now coming to the second part it says that an increase in consumer income will increase the price and quantity of beetles sold now we can see that the income elasticity of demand for beetles is 1 .5 so it simply means that the income elasticity is greater than zero as we can see so this means that beetles is a normal good in case of normal good what happens as the income of the consumer increases the demand for the normal good also increases and as the income of the consumer decreases the demand for the normal good also decreases so in this case we can see that the demand for beetle will increase previously the demand curve and the supply curve for beetles were intersecting at this point so this is the initial equilibrium.

02:01 So at this price at this point we can see the equilibrium price is p and equilibrium quantity is q.

02:08 Now it says that the demand for the beatles has increased with the increase in income.

02:14 As we know beetles are normal good and the demand has increased.

02:17 Now the demand curve will shift rightward from dd to d1.

02:21 So this is the new demand curve and we assume that supplier remains the same.

02:26 So we can say at this point they will intersect at a new equilibrium point that is e1.

02:31 So this is the new equilibrium point.

02:33 So at this new equilibrium point, the equilibrium price has increased from p to p1 and equilibrium quantity has increased from q to q1...

Please give Ace some feedback