Calculate Elasticity of Demand for the Honda Accord
Suppose the annual demand function for the Honda Accord is Qd = 430 – 10 PA + 10 PC – 10 PG, where PA and PC are the prices of the Accord and the Toyota Camry respectively (in thousands), and PG is the price of gasoline (per gallon).
Given that both cars sell for $20,000 and fuel costs $3 per gallon, let's calculate the elasticity of demand for the Honda Accord:
Elasticity of Demand with respect to the price of Camry:
First, we need to calculate the number of units demanded.
Qd = 430 – 10(20) + 10(20) – 10(3.00)
Qd = 400 units
Now, calculate the Cross-price elasticity of the Accord with respect to the price of the Camry:
Cross Price = (dQd/dPC) x (PC)/(Qd)
Cross Price = (10 * 20) / 400 = 0.5
Elasticity with respect to the price of gasoline:
To calculate the elasticity with respect to the price of gasoline, use the formula:
Elasticity = (dQd/dPG) * (PG/Qd)
Substitute the values to find the elasticity:
Elasticity = (-10) * (3/400) = -0.075
In conclusion,When both cars sell for $20,000 and fuel costs $3 per gallon, the elasticity of demand of the Accord with respect to the price of Camry is 0.5, and the elasticity with respect to the price of gasoline is -0.075.