Refer to the \"In the News\" below In the News: SUV Sales Drop with Gasoline Pri
ID: 2401050 • Letter: R
Question
Refer to the "In the News" below In the News: SUV Sales Drop with Gasoline Price Rise Analysts say that with the increase in gasoline prices comes a drop in SUV sales and trade-in values at dealerships. The U.S. Department of Energy said that during the past week, U.S. gasoline prices topped 53 a gallon-the highest level since October 2008. ccording to Alec Gutierrez, lead analyst for vehicle evaluation at Kelley Blue Book, SUV sales have decreased about 1 percent since the last major gasoline price hike in spring 2008. He doesn't believe that SUV sales will decrease significantly unless prices reach $3.50 to $4 per gallon. -Andrew Christian ource: 4WheelsNews.com If a gasoline price hike of 5 percent caused the SUV sales drop described, what is the cross-price elasticity of demand between gasoline and SUVs? Instructions: Enter your response rounded to two decimal places. Indicate negative answers with a ? negative sign. Cross-price elasticityExplanation / Answer
Definition: "Cross Elasticity of demand" is defined as a measurement in which it measures the sensitivity of quantity demand change of product X to a change in the price of product Y. It tells us the relationship between two products. Formula of Price Elasticitry of Demand =Percentage change in Quantity demanded of Product X/Percentage change in Price of Y.
The Price Elasticity is denoted by "Exy".
If Exy > 0, then Quantity Demand of X and Price of Y are directly related. X and Y are substitutes.
If Exy approaches 0, then Quantity demand of X stays the same as the price of Y changes. X and Y are not related.
If Exy < 0, then Quantity demand of X and Price of Y are inversely related. X and Y are complements.
In the given case, the gasoline price hike of 5% leads to SUV sales decrease by 1%. Therefore,
Cross Elasticity of Demand or Price Elasticity of Demand(Exy) = -1%/5% = -0.20 (i.e. Negative 0.20).
Therefore product SUV and product Gasoline are inversely related. Hence X and Y are complementary.