Question

Consider the case of Mercedes-Benz ("Mercedes"), the high-end German auto

manufacturer.

a. Would you expect the price elasticity of demand for Mercedes’ automobiles to be
elastic or inelastic? Base your answer on four of the factors that affect the price
elasticity of demand.

b. Given its price elasticity of demand, what should Mercedes do to the price of its
cars if it wanted to increase its total revenue? Explain briefly.

c. Given its price elasticity of demand, what should Mercedes-Benz do in terms of
strategic positioning? Explain briefly how that strategy would be implemented.

d. In what range would the income elasticity for Mercedes fall? Suppose you are a
mutual fund manager that must invest money in stocks. If the global economy is
expected to be in a downturn later this year, should you invest in Daimler AG, the
parent company of Mercedes, or in another company? Explain briefly.

e. In what range would the cross-price elasticity for Mercedes cars and gasoline
fall? Explain briefly.

Answer 1

The demand for Mercedes-Benz cars tends to be inelastic due to factors like luxury status and brand loyalty. For increased revenue, Mercedes could raise car prices. However, during an economic downturn, investing in luxury brands such as Daimler AG might be risky.

Step-by-step explanation:

Price Elasticity of Demand for Mercedes-Benz Automobiles

Considering the factors that affect the price elasticity of demand, we would expect the price elasticity of demand for Mercedes-Benz automobiles to be inelastic. The factors influencing this include the luxury status of the brand, the lack of close substitutes, the brand loyalty of customers, and the fact that the cost of a Mercedes is a smaller proportion of a wealthier consumer's income.

Strategies to Increase Total Revenue

Given that the demand is inelastic, if Mercedes-Benz wanted to increase its total revenue, it could potentially raise the price of its cars. This is because consumers are less sensitive to price changes and would likely continue to purchase the vehicles despite the increase in price.

Strategic Positioning

Mercedes-Benz should continue to focus on its premium branding and ensure that it maintains a high level of product quality and customer service. By doing so, it will further reinforce the inelasticity of demand, allowing for steady revenue streams even when prices rise.

Income Elasticity of Demand

The income elasticity for Mercedes-Benz is likely to be in the positive range, indicating that it is a normal luxury good. In the face of an anticipated global economic downturn, investing in Daimler AG may not be advisable as consumers tend to reduce spending on luxury goods during such times. Alternative investments may offer more stability.

Cross-Price Elasticity with Gasoline

Considering Mercedes-Benz cars are luxury vehicles, the cross-price elasticity for Mercedes cars and gasoline is expected to be fairly inelastic. Consumers of high-end luxury cars are less sensitive to changes in gasoline prices when it comes to their car purchase decision.