Question: Problem 1

Suppose that the current market price of VCRs is $300, that average consumer disposable income is $30,000, and that the price of DVD players (a substitute for VCRs) is $500. Under these conditions annual U.S. demand for VCRs is 5 million per year. Statistical studies have shown that for VCRs the own-price elasticity of demand is –1.3. The income elasticity of demand for VCRs is 1.7. The cross-price elasticity of demand for VCRs with respect to DVDs is 0.8. Use this information to predict the annual number of VCRs sold under the following conditions:

(1) Increasing competition from Asia causes VCR prices to fall to $270 with incoMeand the price of DVDs is unchanged.

(2) Income tax reductions raise average disposable personal income to $31,500
with prices unchanged.

(3) An inventor finds a cheaper way to produce DVDs, reducing the price of a DVD to $400, with the price of VCRs and income unchanged.

(4) All of the events described in parts 1-3 occur simultaneously.