MCQ for Economics June 2007 Paper 1 Question 9

[arvind0708]

9 The table gives information about the market for two models of car.

model number of cars sold per week cross elasticity of demand with
respect to the price of petrol


1200 cc 10 000 –0.25
2000 cc 5 000 –0.50
If the prices of the cars remain unchanged, but the price of petrol increases by 100 %, what will
be the effect on the number of cars sold per week?
A increase by 5000
B no change
C decrease by 5000
D decrease by 15 000

What calculation should be done to get the answer.

 

[Xenon]

The data given is that of XED. An increase in price of petrol will reduce the demand for cars.

For 1200cc, %Δ QD of cars/ %Δ in price of petrol = -.25
therefore, %Δ QD of cars = -.25 x 100 = -25%
this implies the sales of 1200cc cars decreased by 10000 x 25% = 2500 unit

For 2000cc, %Δ QD of cars/ %Δ in price of petrol = -.5
therefore, %Δ QD of cars = -.5 x 100 = -50%
this implies the sales of 2000cc cars decreased by 5000 x 50% = 2500 unit

Total fall in sales= 2500+2500 =5000
Ans: C