Suppose that during a given year: (1) the price of TV sets increases by 4% in Japan, (2) the dollar depreciates by 5% with respect to the yen, (3) the consumers’ incomes in the U.S. increase by 3%, (4) the price of elasticity of demand for imported TV sets in the U.S. is -1.5, and (5) consumers’ income elasticity of demand for TV sets in the U.S. is 2.
A)If the price of the imported TV set was $300 in the U.S. at the beginning of the year, approximately how much would you expect the price of the same imported TV set to be in the U.S. at the end of the year?
B)By how much would the quantity demanded of imported TV sets in the United States change as a result of the change in price only?
C)By how much would the demand for imported TV sets in the U.S. change as a result of the increase in consumers’ income alone?
D)By how much would the demand for imported TV sets in the U.S. change as a result of both the change in price and incomes?
To properly answer these questions, you would need to know something about the elasticity of supply. However, if you can assume the elasticity of supply for TV sets in the US is highly elastic, then the problems can be easily solved.
That said, take a shot. What do you think the answers are?
To answer these questions, we can use the concept of elasticity and the given information about the price change, income change, and elasticities. Let's go step by step:
A) To calculate the expected price of the imported TV set at the end of the year, we need to consider the price increase in Japan (4%) and the depreciation of the dollar against the yen (5%).
To find the total change in price, we can add the two percentages:
Total Change in Price = Price Increase in Japan + Depreciation of Dollar
Total Change in Price = 4% + 5%
Total Change in Price = 9%
Next, we need to determine the new price by applying the change to the starting price:
New Price = Starting Price + (Starting Price x Total Change in Price)
New Price = $300 + ($300 x 9%)
New Price = $300 + $27
New Price = $327
So, approximately, the price of the same imported TV set in the U.S. at the end of the year would be $327.
B) To calculate the change in quantity demanded of imported TV sets in the United States as a result of the change in price only, we can use the price elasticity of demand. The given price elasticity of demand for imported TV sets in the U.S. is -1.5.
The formula to calculate the percentage change in quantity demanded is:
Percentage Change in Quantity Demanded = Price Elasticity of Demand x Percentage Change in Price
Percentage Change in Quantity Demanded = -1.5 x 9%
Percentage Change in Quantity Demanded = -13.5%
So, the quantity demanded of imported TV sets in the United States would decrease by approximately 13.5% as a result of the change in price only.
C) To calculate the change in demand for imported TV sets in the U.S. as a result of the increase in consumers' income alone, we can use the income elasticity of demand. The given income elasticity of demand for TV sets in the U.S. is 2.
The formula to calculate the percentage change in demand is:
Percentage Change in Demand = Income Elasticity of Demand x Percentage Change in Income
Percentage Change in Demand = 2 x 3%
Percentage Change in Demand = 6%
So, the demand for imported TV sets in the U.S. would increase by approximately 6% as a result of the increase in consumers' income alone.
D) To calculate the change in demand for imported TV sets in the U.S. as a result of both the change in price and incomes, we need to consider the effects of both changes.
Since the price elasticity of demand and income elasticity of demand are different, we cannot simply sum the percentage changes. We need more information, specifically the cross-price elasticity of demand between imported TV sets and incomes in the U.S., to accurately determine the combined effect of price and income changes on demand.
Therefore, without the cross-price elasticity of demand information, we cannot determine the specific change in demand for imported TV sets in the U.S. resulting from both the change in price and incomes.