Chrysler Crossfire

Market researchers at Chrysler have estimated the demand for their new Chrysler
Crossfire sports cars as follows:
QC = 1,050,000 − 95PC + 14.25M + 60PBMW + 25PP
where QC is the quantity of Chrysler Crossfires sold annually, PC is the price of a
Chrysler Crossfire, M is average household income, PBMW is the price of BMW’s
330i sports sedan, and PP is the price of Porsche’s Boxster S sports car. The marketing
team at Chrysler plans to price the Crossfire at $32,000. They predict that
average household income is $75,000 for buyers in the market for their sports sedan.
The current prices for BMW’s 330i and Porsche’s Boxster S are $34,000 and
$50,000, respectively. Use this information to answer the following questions.
a. Compute the predicted annual sales of the Chrysler Crossfire:
QC = ____________ units per year.
b. Compute the income elasticity of demand for the Chrysler Crossfire:
EM = __________.
The computed value of income elasticity indicates the Crossfire is a(n)
_______________ good. Average household income is predicted to fall next
year by 2.5 percent, which will cause sales to _________ (rise, fall) by
_______ percent (assuming other factors remain the same).
c. Compute the price elasticity of demand for the Chrysler Crossfire:
E = __________.
At the current price of $32,000, Chrysler is choosing to price in the
______________ (elastic, inelastic) region of demand. At this point, a 5 percent
increase in the price of Crossfires would be expected to cause sales to
fall by ________ percent (assuming other factors remain the same).
d. Compute the cross-price elasticity of demand for Chrysler Crossfires with respect
to changes in the price of the BMW 330i:
EC-BMW = __________.
Compute the cross-price elasticity of demand for Chrysler Crossfires with respect
to changes in the price of the Porsche Boxster S:
EC-P = __________.
Both cross-price elasticities are _______________ (positive, negative,
greater than 1, less than 1) because these two cars are viewed by car-buyers
as ______________ (substitute, complement, inferior, normal) goods.