Question

What effect will each of the following have on the demand for small automobiles such as the Mini-Cooper and Fiat 500?A. Small automobiles become more fashionable: IncreaseB. The price of large automobiles rises (with the price of small autos remaining the same): IncreaseC. Income declines and small autos are an inferior good: IncreaseD. Consumers anticipate that the price of small autos will greatly come down in the near future: decreaseE. The price of gasoline substantially drops: Cannot be determined

Answer 1

Answer: The explanation are as follows:

Explanation:

(A) If small automobiles become more fashionable then this will attract the consumers attention towards small automobiles. So, this will increase the demand for the small automobiles.

(B) If the price of large automobiles rises and the price of small automobiles remains the same. They both are substitute goods. So, the demand for small automobiles increases as the price of its substitute goods increases.

(C) If small automobiles are inferior good and there is reduction in the income of consumers. This will increase the demand for small automobiles as the income of the consumers decreases.

(D) If consumers anticipate that the price of small autos will greatly come down in the near future then they stop buying small automobiles today. So, the demand for small automobiles decreases because consumers waiting for the lower price in the near future.

(E) Gasoline and small automobiles are complementary goods, therefore, if the price of gasoline substantially drops, as a result demand for small automobiles increases.