Q1) (i) Demand function for air travel between U.S. and Europe has been estimated to be ln Q = 2.737 - 1.247 ln P +1.905 ln I where Q signifies number of passengers (in thousands) per year, P (average) ticket price and I the U.S. national income. Find out price elasticity and income elasticity of demand.
(ii) It has been evaluated that price elasticity of demand for U.S. manufactured automobiles is -1.2, while income elasticity of demand is 2.0 and cross price elasticity of demand with respect to foreign automobiles is 1.5. The present volume of sales for U. S. manufactured automobiles is 10 million per year. It is expected that over next year average income of consumers in U.S. will increase by 2.5 percent. It has been determined that price of foreign imports will increase by 6% over next year. By how much must U.S. automakers adjust price of their automobiles if they wish to rise the volume of their sales by 9.2% next year?