Q1. F. James McDonald the former president of the US automobile workers federation suggested an average reduction of 4% in the price of the car. The automobile market was weak, that resulted in unemployment. Lower price would lead to greater sales also stimulate employment. McDonald believed to a 4% reduction in price would rise sales by 16%.

David black, representing the management of the automobile manufacturers disagreed with McDonald's assessment. Black cited studies that indicated price elasticity's ranging from 0.5 to 1.5. Black made it clear to he was referring to the elasticity of Demand ing response to a permanent price change of all manufacturers. He admitted to the elasticity to a temporary price cut might be greater. The studies to that Black referred found elasticity's ranging from 0.65 to 1.53.

a. Elucidate the concept of elasticity of Demand also the factors to affect it.

b. Interpret the meaning of David Blake's Demand estimate ranging from .65 to 1.53. Elucidate the significance of Demand elasticity in taking trade decision