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3.5 Recent research studies have shown that in the Canadian market for family sedan passenger cars I) the price elasticity of demand is Ep =
3.5 Recent research studies have shown that in the Canadian market for family sedan passenger cars I) the price elasticity of demand is Ep = - 2.0; ii) the income elasticity of demand is Ei = +4.0; the cross-elasticity of demand with respect to the price of gasoline is Egxy = -0.5 and iv) the cross-elasticity of demand with respect to short-term interest rates is Erxy = -2.0. Suppose that 800,000 such vehicles were sold in 2010. Based on the above elasticity values, forecast the 2015 sales based on the following assumptions: a ) Price increases 2%, Incomes rise 2%, Gasoline prices rise 10% and interest rates remain constant; b ) Price increases 2%, incomes rise 1%, gasoline prices rise 6% and interest rates rise 10%; C) Price stays the same, incomes fall 1%, gasoline prices rise 10% and interest rates rise 10%. 3.6 Suppose that the short-term and long-term price elasticity of supply for Canadian Durum wheat is S-T-Esp = + 0.2 and L-T-Esp = + 1.4. Currently the average price of wheat is $200 per ton and the production of wheat is 4,000,000 tons per annum. Forecast the production of wheat one year ahead and five years ahead using the above elasticity values based on the following assumptions: a) The price of wheat rises 50% b ) The price of wheat rises 100% C) On a graph draw the short-run and the long-run supply of wheat curve
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