Question

Suppose the following table describes Jocelyn’s weekly snack purchases, which vary depending on the price of a bag of chips:

Price of bag of chips	Bags of chips	Containers of salsa	Bags of pretzels	Cans of soda
$1.00	2	3	1	4
$1.50	1	2	2	4

5.) What is the Cross-Price Elasticity of Demand between the quantity of salsa and the price of chips? (the sign matters here)

6.) What is the Cross-Price Elasticity of Demand between the quantity of pretzels and the price of chips? (The sign matters here. You can round to the nearest .1 decimal point.)

7.) What is the cross-price elasticity of soda with respect to the price of a bag of chips?

8.) You find that the income elasticity for a particular good is +2.5. Is this a normal or inferior good? Is it a luxury good or a necessity?

		Normal Good because the income elasticity is positive Luxury Good because the income elasticity is greater than 1 (elastic)
		Inferior Good because the income elasticity is positive Luxury Good because the income elasticity is greater than 1 (elastic)
		Normal Good because the income elasticity is positive Necessity because the income elasticity is greater than 1 (elastic)
		Inferior Good because the income elasticity is positive Necessity because the income elasticity is greater than 1 (elastic) 9.) You find that the income elasticity for a particular good is -0.5. Is this a normal or inferior good? Is it a luxury good or a necessity? Normal Good because the income elasticity is negative Luxuries/necessities only apply to inferior goods, so neither Inferior Good because the income elasticity is negative Luxury Good because the income elasticity is less than 1 in magnitude (inelastic) Inferior Good because the income elasticity is negative Necessity because the income elasticity is less than 1 in magnitude (inelastic) Inferior Good because the income elasticity is negative Luxuries/necessities only apply to normal goods, so neither

Answer 1

Using midpoint method:

(5)

Cross-price elasticity = [(Change in demand for salsa / Average demand for salsa)] / [Change in price of chips / Average price of chips)]

= [(3 - 2) / (3 + 2)] / [(1 - 1.5) / (1 + 1.5)]

= (1 / 5) / (- 0.5 / 2.5)

= - 1

(6)

Cross-price elasticity = [(Change in demand for pretzel / Average demand for pretzel)] / [Change in price of chips / Average price of chips)]

= [(1 - 2) / (1 + 2)] / [(1 - 1.5) / (1 + 1.5)]

= (- 1 / 3) / (- 0.5 / 2.5)

= 1.7

(7)

Cross-price elasticity = [(Change in demand for soda / Average demand for soda)] / [Change in price of chips / Average price of chips)]

= [(4 - 4) / (4 + 4)] / [(1 - 1.5) / (1 + 1.5)]

= (0 / 8) / (- 0.5 / 2.5)

= 0

(8) Option (1)

A positive income elasticity higher than 1 means the good is normal and a luxury.

(9) Option (4)

A negative income elasticity means the good is inferior, so the necessity/luxury classification is inapplicable.