Economists have made estimates of the price elasticity of demand for a variety of goods and services. They have also estimated income elasticity and cross-price elasticity.

1. What is price elasticity and why is it important to estimate price elasticities? Provide your own examples to support your answer.
2. Seiko is planning to increase the price of its watches by 10 percent in the coming year. Economic forecasters expect real disposable personal income to increase by 6 percent during the same period. From past experience, the price elasticity of demand has been estimated to be approximately -1.3 and the income elasticity has been estimated at 2.0. These elasticities are assumed to remain constant over the range of price and income changes anticipated. Seiko currently sells 2 million watches per year. Determine the forecasted demand for next year (assuming that the percentage price and income effects are independent and additive).