A study by economists has determined that the category price elasticity of the consumer car rental market in the United States is –1.25. National Car Rental is considering lowering its prices by 6 percent.
(a) If Hertz, Avis, and the other nationwide car rental companies match National’s price cut, what is the sales change that National can expect? Show your work.
(b) If National’s competitors maintain their prices and do not match National’s price cut, how would that affect the sales-change estimate you gave for Part (a)? Explain your reasoning.