Suppose the chairman and chief executive officer of General Motors has decided to a) raise the company's auto prices by 5%. In addition, suppose that the following events have been forecast for the next year: b) the price of competitors cars are due to rise by 8%; d) consumers' incomes will rise by 2%; and d) the price of gasoline is due to fall by 20%. You, as head of production, must decide what all of these events mean for GM's car sales so that you can plan production accordingly. You hire an economics consulting firm that provides you with these estimates based on econometric studies:
Price elasticity of demand for GM cars is 2.0 (in absolute value terms)
Cross price elasticity between GM cars and those of its competitors is +.5
Cross price elasticity between GM cars and gasoline is -.3
Income elasticity of demand for GM cars is +1.6
Calculate the effect of each of these four changes on demand based on the estimates provided. What is the net effect of all the changes taken together?
a. Increase the company's auto prices by 5%.
b. the price of competitors cars are due to rise by 8%;
c. consumers' incomes will rise by 2%; and
d. the price of gasoline is due to fall by 20%.
e. Net effect to demand