1. What do you understand by the following terms? Explain using formulae, diagrams and examples. What are the determinants of the measurement of each term?
Own price elasticity of demand
Cross price elasticity of demand
Income elasticity of demand
Consider the following information, produced by a market research agency, about a model of car your firm produces the Magpie and a competitive model, the Eagle.
All the information relates to long term market adjustments.
Own price elasticity of demand for the Magpie (-) 2.7
Cross price elasticity of demand with respect to the Eagle + 3.2
Income elasticity of demand for the Magpie target market + 1.5
2. Using the concept of cross price elasticity of demand, does your firm have market power in respect to the Eagle. Why or why not?
Explain the relationship between the Magpie and the Eagle.
Explain what would be the effect of a 10% increase in the income of the target market have on the demand for the Magpie?
Your firm's accountant argues that because the demand for the Magpie is price elastic, the firm should drop its price. Briefly discuss this recommendation indicating if you would support this recommendation or not. Give reasons for your advice to management.