The Reliable Aircraft Company manufactures small, pleasure-useaircraft. Based on past experience, sales volume appears to beaffected by changes in the price of the planes and by the state ofthe economy as measured by consumers' disposable personal income.The following data pertaining to Reliable's aircraft sales, sellingprices, and consumers' personal income were collected:

Year	Aircraft Sales	Average Price	Disposable Constant Income
		(Dollars)	(In constant 2006 dollars, billions)
2006	525	17,600	610
2007	450	8,000	610
2008	400	8,000	570

The arc price elasticity of demand between 2006 and 2007 is:

–0.36

0.21

0

0.36

Points:

Close Explanation

Explanation:

The arc income elasticity of demand between 2007 and 2008is:

1.74

3.99

–3.99

0

Points:

Close Explanation

Explanation:

Assume that these estimates are expected to remain stable during2009. Forecast 2009 sales for Reliable assuming that its aircraftprices remain constant at 2007 levels and that disposable personalincome will increase by 7%. Also assume that the arc incomeelasticity you just computed is the best available estimate ofincome elasticity.

Aircraft Sales 2009 Forecast: selector 1

• 505
• 351
• 589
• 449
• 512

Points:

Close Explanation

Explanation:

Forecast 2009 sales for Reliable given that its aircraft priceswill increase by 6% from 2008 levels and that disposable personalincome will increase by 7%. Assume that the price and incomeeffects are independent and additive and that the arc income andprice elasticities you just computed are the best availableestimates of these elasticities to be used in making theforecast.

Aircraft Sales 2009 Forecast: selector 1