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A researcher estimated that the price elasticity of demand for automobiles in the United States is −1.2, while the income elasticity of demand is 3.0. Next year, U.S. automakers intend to increase the average price of automobiles by 5 percent, and they expect consumers’ disposable income to rise by 3 percent.
(a) If sales of domestically produced automobiles are 8 million this year, how many automobiles do you expect U.S. automakers to sell next year?
(b) By how much should domestic automakers increase the price of automobiles if they wish to increase sales by 5 percent next year?
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