Suppose That the Current Market Price of VCRs Is $300,that

Essay

Suppose that the current market price of VCRs is $300,that the average consumer disposable income is $30,000,and that the price of DVDs (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 income and the price of DVDs remaining unchanged.
(2)Income tax reductions raise average disposable personal income to $31,500 with prices unchanged.
(3)An inventor in Menlo Park invents 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.