Is the cross-price elasticity of demand

Reference no: EM131020585

During the spring of 2008, gasoline prices increased sharply in the United States. According to a newspaper article, rising gas prices had the following effect on the car market: Sales of Toyota's subcompact Yaris increased 46 percent, and Honda's tiny Fit had a record month. Ford's compact Focus model jumped 32 percent in April from a year earlier. All those models are rated at more than 30 miles per gallon for highway driving....Sales of traditional SUVs are down more than 25 percent this year. In April, for example, sales of GM's Chevrolet Tahoe fell 35 percent. Full-size pickup sales have fallen more than 15 percent this year, with Ford's industry-leading F-Series pickup dropping 27 percent in April alone.

a. Is the cross-price elasticity of demand between gasoline and high-mileage subcompact cars positive or negative? Is the cross-price elasticity of demand between gasoline and low-mileage SUVs and full-size pickups positive or negative? Briefly explain.

b. How can we best think of the relationships among gasoline, subcompact cars, and SUVs? Briefly discuss which can be thought of as substitutes and which can be thought of as complements. Source: Bill Vlasic, "As Gas Costs Soar, Buyers Flock to Small Cars," New York Times, May 2, 2008.

Reference no: EM131020585

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