Despite Soaring Prices, Americans Bought Record Number of Used Cars in 2021

EconEye Admin

4 years ago

Although used car prices rose 28 percent in 2021, Americans bought 40.9 million used vehicles, 10% more than in 2020. The new car market is experiencing shortages and soaring prices.—kbb.com

Answer the following questions to check your understanding of the story.

1) Does the news clip give data to calculate the price elasticity of demand or the price elasticity of supply? What is its value?

The price elasticity of ______________ and it equals _____________.

a) supply if the supply didn’t change; 0.36

b) demand if the supply changed; 0.36

c) demand if the supply changed; 2.8

d) supply if the supply didn’t change; 2.8

The news clip describes an increase in the quantity of used cars bought and sold and a rise in the price. Does this describe a movement along the demand curve or a movement along the supply curve? Can we use the data in the news clip to calculate the price elasticity of demand or the price elasticity of supply?

As the demand for used cars increases, the quantity of used cars supplied increases and the price rises. If the supply of used cars did not change, we can calculate the price elasticity of supply. The percentage change in quantity supplied divided by percentage change in price is 10 percent/28 percent = 0.36.

2) What do we know about the cross elasticity of demand for used cars with respect to the price of new cars?

The cross elasticity of demand for used cars with respect to the price of new cars is ______________. Used cars and new cars are ______________.

a) positive; substitutes

b) positive; complements

c) negative; complements

d) negative; substitutes

When the price of new cars rises, the quantity of used cars demanded increases. Is the cross elasticity of demand positive or negative, and are new cars and used cars substitutes or complements?

When the price of new cars rises, the quantity of used cars demanded increases, so the cross elasticity is positive. When cross elasticity of demand is positive, the goods are substitutes.

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