Problem 1. The demand in Japan for new automobiles is elastic and sensitive to market prices. Given that, describe the effect of each of the following on the quantity demanded or the demand for new autos in Japan. Indicate whether the effect of each is an upward or downward movement along a given demand curve or instead involves an outward or inward shift in the demand curve for new autos. Explain your answers.
a. A decrease in the average price of new Japanese automobiles.
b. A fall in Japanese interest rates.
c. A rise in the price of public transportation in Japan.
d. A rise in the price of food in the United States.
Problem 2. Suppose the demand for beer is characterized by the following point elasticities:
own price elasticity = -2.5
cross-price elasticity with soda = +3
income elasticity = +2
Based on the given elasticities, answer the following. Explain your answers.
a. If a firm in the industry wishes to increase total sales revenue (ignoring cost considerations), will it raise or lower its selling price? Why?
b. What happens to the demand for beer if the price of soda falls by 2%? Explain your answer.
c. What happens to the demand for beer if consumer income rises by 5%? Be specific.
d. Is beer a normal or inferior good? Explain.