Question

a. The price elasticity of a good is -4.2. What does this mean? What would happen to the total revenue collected if prices were to increase by 10% and explain your answer.

b. The income elasticity of a good is 0.25. What does this mean? What can we conclude about this good and explain how you came to this conclusion?

c. The cross-price elasticity of a good is -1.5. What does this mean? What can we conclude about this good and explain how you came to this conclusion?

Answer 1

A) The price Elasticity tells how much percentage Quantity demanded Change due to 1% change in price.

So Elasticity=-4.2, means , change in 1% peice of good lead to 4.2% change in quantity demanded in opposite direction.

Percentage change in total revenue= % change in price + % change in quantity demanded

So 10% Increase in price will decrease Quantity demanded=-4.2*10=-42%

So change in total revenue=10-42=-32%

So total revenue will decrease by approximately 32%.

B)The income Elasticity tells how much Quantity demanded change due to 1% change in income.

Positive Income Elasticity tells that Increase in income lead to increase in quantity demanded and vice versa,so it means good is normal.

C) The cross Elasticity of demand tells that how much Quantity demanded change due to 1% change in price of other good.

Negitive cross Elasticity tells that change in price of Other good lead to change in quantity demanded in opposite direction.so negitive Elasticity tells the other good is complementary good.