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Solution: Between 1999 and 2000, the quantity of automobiles produced and sold declined by 20 percent. During this period, the real price of cars increased

Question: Between 1999 and 2000, the quantity of automobiles produced and sold declined by 20 percent. During this period, the real price of cars increased by 5 percent, real income levels declined by 2 percent, and the cost of gasoline increased by 20 percent. Knowing that the income elasticity of demand is +1.5 and the cross price elasticity of gasoline and cars is -0.3.

  1. Compute the impact of the decline in real income levels on the demand for cars
  2. Compute the impact of the gasoline price increase on the demand for cars.
  3. Compute the price elasticity of the demand for cars during this period.

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