Your Company Manufactures a High-Efficiency Natural Gas Furnace

question 120

Essay

Your company manufactures a high-efficiency natural gas furnace. The current price is $2000 per unit. The price elasticity of demand is -2.5 for prices between $1500 and $2500. Your CEO has asked you to predict the net effect on demand for various scenarios. You have determined that there are three major factors that will affect your demand: the price of competitors' products, income, and the price of natural gas. You have hired a consulting company to estimate the effects of these factors. The results are as follows: (1) the cross price elasticity of demand between your product and your competitors' products is constant at +.5, (2) income elasticity of demand for your products is constant at +1.6, and (3) the cross price elasticity of demand between your product and natural gas is constant at +.3.
a) By what percent would your demand change if you increased price by 5% and all other factors remained constant?
b) By what percent would your demand change if you did not increase price but your competitors increased their prices by 8% and all other factors remained constant?
c) By what percent would your demand change if you did not increase price but income decreased by 2% and all other factors remained constant?
d) By what percent would your demand change if you did not increase price but the price of natural gas fell by 20% and all other factors remained constant?
e) What is the net effect on your demand of all changes taken together (you increased price by 5% and competitors increased price by 8% and income decreased by 2% and the price of natural gas fell by 20%)? Assume the effects of each change are independent and cumulative.

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Definitions:

Government Positions

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Printing Press

A mechanical device invented by Johannes Gutenberg in the 15th century, which allowed for the mass production of printed materials, significantly impacting the spread of knowledge.

Movable Type

The system and technology of printing and typography that uses movable components to reproduce the elements of a document.

Columbus's Voyage

The expedition led by Christopher Columbus in 1492, which led to European awareness and eventual colonization of the Americas.