Question

True or False

1.The Cross-Price elasticity of demand for good X is -2, if its demand changes from 100 units to 300 units, because of an increase in Price of Good Y from $1 to $2?

2.If the Demand for a good is inelastic, we can say that, as Price decreases, the Total Revenue will decrease.

3.If the demand for a good rises, when income falls, the good is an inferior good.

4.Because of the law of supply, we can be sure that price elasticity of supply, which measure the responsiveness of quantity supplied to a change in market price of the good, will always be NEGATIVE.

Answer 1

1. Formula for cross price elasticity= percentage change in quantity demanded of one good / percentage change in price of another good

= [((300-100)/100)*100] /[((2-1)/1)*100]

= [(200/100)*100)] / [(1/1)*100]

= 200/100 = 2

False, the cross price elasticity is +2 implying the goods X and Y are substitute goods.

2. True

​​​​​​If the demand for a good is inelastic, the price and total revenue change in same direction. If price decreases, the quantity demanded remains same since inelastic demand and consequently the total revenue decreases.

3. True

Inferior goods are negatively related to income. When income falls, their demand increases and when income rises their demand falls.

On the other hand, norm goods are positively related with income. Their demand increases with increase in income and falls with fall in income.

4. False

In fact according to law of supply, the elasticity of supply is always positive. Since price has a positive relation with quantity supplied, when price increases it acts as an incentive for increased profits thus producers are ready to produce and supply more.

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