Question

1. In Malaysia, if you want to get a smaller car, there are several brands available: Proton, Kia, and Mazda. Suppose the demand for Proton has an own-price elasticity of -4.5, the cross-price elasticity with respect to the price of Kia of 2.5, and the cross-price elasticity with respect to the price of Mazda of 1.5. The demand for Kia had an own-price elasticity of -4.2, the cross-price elasticity with respect to the price of Proton of 2, and the cross-price elasticity with respect to the price of Mazda of 1.5. The demand for the Mazda had an own-price elasticity of -3.6, the cross-price elasticity with respect to the price of Proton of 1.6, and the cross-price elasticity with respect to the price of Kia of 1.2. Suppose the demand for Mazda has an income elasticity of 1.8.

A. By what percentage will a 2% decrease in the price of Proton affect total revenue on the Proton?

B. By what percentage will a 2% decrease in the price of Proton affect total revenue on the Kia?

C. By what percentage will a 2% increase in consumers’ income affect total revenue on Mazda?

Answer 1

A)

Proton Price elasticity of demand = -4.5

This means a 2% decrease in price of Proton will increase sales by 2 x 4.5 = 9%

Due to elastic nature of Proton sales, total revenue will increase as price falls

B) Cross price elasticity = 2

This means a 2% decrease in price of Proton will decrease sales of Kia by 2 x 2 = 4%

This means sales of Kia will fall and so will its total revenue

C) Mazda income elasticity = 1.8

This means a 2% increase in consumer income will increase Mazda sales by 1.8 x 2 = 3.6%

Thys total revenue of Mazda will increase as consumer income increases.