The price elasticity of new automobile purchases is about 1.2.This implies that an increase of $1,000 on a $10,000 automobile will
A)reduce the number of autos sold by approximately 1.2 percent.
B)increase the consumer expenditures on autos by approximately 1.2 percent.
C)reduce the number of autos sold by approximately 12 percent.
D)increase consumer expenditures on autos by approximately 12 percent.

Question

Quizplus · Accepted Answer

The price elasticity of new automobile purchases of 1.2 indicates that a 1% increase in price will lead to a 1.2% decrease in the quantity demanded (1.2 x 1% = 1.2%). Therefore, an increase of $1,000 on a $10,000 automobile is a 10% increase in price (1000/10000 x 100). Using the elasticity of 1.2, we can estimate that there would be a 12% decrease in the quantity demanded (1.2 x 10%). So, the number of autos sold would reduce by approximately 12%.

The Price Elasticity of New Automobile Purchases Is About 1