Answer to Question #302971 in Economics of Enterprise for Masum

Question

What effect will each of the following have on the demand for small automobiles such

as the Mini-Cooper and Smart car? Answer with graph.

i. Small automobiles become more fashionable.

ii. The price of large automobiles rises (with the price of small autos remaining the

same).

iii. Income declines and small autos are an inferior good.

iv. Consumers anticipate that the price of small autos will greatly come down in the

near future.

v. The price of gasoline substantially drops.

Answer 1

(I) Small automobiles become more fashionable.

When small automobiles become more fashionable, their demand will increase as shown on the following graph.

(II) The price of large automobiles rises (with the price of small autos remaining the

same.

When price of large automobiles increase, then consumers will shift their interest to small automobiles and consequently the demand will shoot up as shown;

(III) Income declines and small autos are an inferior good.

An inferior good is a good that it's demand reduces when income increases and vice versa.

When income reduces, the economy contracts and inferior goods become more affordable. So, in this case, demand will increase as shown below:

(IV) Consumers anticipate that the price of small autos will greatly come down in then near future.

If consumers anticipate that the price of small automobiles will come down, they are likely to hold purchasing the automobiles and demand will fall as shown:

(V) The price of gasoline substantially drops.

This will increase demand for automobiles and consequently increase demand for gasoline as shown: