Reference no: EM13201552
Market researchers at Chrysler have estimated the demand for their new Chrysler Crossfire sports cars as follows:
QC = 1,050,000 ? 95PC + 14.25M + 60PBMW + 25PP
Where QC is the quantity of Chrysler Crossfires sold annually, PC is the price of a Chrysler Crossfire, M is average household income, PBMW is the price of BMW's 330i sports sedan, and PP is the price of Porsche's Boxster S sports car. The marketing team at Chrysler plans to price the Crossfire at $32,000. They predict that average household income is $75,000 for buyers in the market for their sports sedan.
The current prices for BMW's 330i and Porsche's Boxster S are $34,000 and $50,000, respectively. Use this information to answer the following questions.
a. Compute the predicted annual sales of the Chrysler Crossfire:
QC = ____________ units per year.
b. Compute the income elasticity of demand for the Chrysler Crossfire:
EM = __________.
The computed value of income elasticity indicates the Crossfire is a(n) _______________ good. Average household income is predicted to fall next year by 2.5 percent, which will cause sales to _________ (rise, fall) by _______ percent (assuming other factors remain the same).
c. Compute the price elasticity of demand for the Chrysler Crossfire:
E = __________.
At the current price of $32,000, Chrysler is choosing to price in the ______________ (elastic, inelastic) region of demand. At this point, a 5 percent increase in the price of Crossfires would be expected to cause sales to fall by ________ percent (assuming other factors remain the same).
d. Compute the cross-price elasticity of demand for Chrysler Crossfires with respect to changes in the price of the BMW 330i:
EC-BMW = __________.
Compute the cross-price elasticity of demand for Chrysler Crossfires with respect to changes in the price of the Porsche Boxster S:
EC-P = __________.
Both cross-price elasticities are _______________ (positive, negative, greater than 1, less than 1) because these two cars are viewed by car-buyers as ______________ (substitute, complement, inferior, normal) goods.
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