Question: A researcher estimated that the price elasticity of demand for automobiles in the United States is -1.2, while the income elasticity of demand is 3.0. Next year, U.S. auto makers intend to increase the average price of automobiles by 5 percent, and they expect consumers’ disposable income to rise by 3 percent.

1. If sales of domestically produced automobiles are 8 million this year, how many automobiles do you expect U.S. auto makers to sell next year? (4 points)
2. By how much should domestic auto makers increase the price of automobiles if they wish to increase sales by 5 percent next year? (4 points)

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