Question

Suppose the own price elasticity of demand for good X is -3, its income elasticity is 1, its advertising elasticity is 2, and the cross-price elasticity of demand between it and good Y is -4. Determine how much the consumption of this good will change if:

Instructions: Enter your responses as percentages. Include a minus (-) sign for all negative answers.

a. The price of good X decreases by 5 percent.

percent

b. The price of good Y increases by 8 percent.

percent

c. Advertising decreases by 4 percent.

percent

d. Income increases by 4 percent.

percent

Answer 1

a.

Given,

The own-price elasticity of demand for good X = -3

% change in the price of good X = -5%

% change in the quantity demanded of good X = Own-price elasticity of demand for good X* % change in the price of good X= -3 * (-5%) = 15%

Ans: The change in consumption of good X = 15%

b.

Given,

The cross-price elasticity of demand between good X and good Y is -4

% change in the price of good Y = 8%

% change in the demand for good X =Cross price elasticity of demand between good X and good Y * % change in the price of good Y = -4 * 8%= -32%

Ans: The change in consumption of good X = -32%

c.

Given,

The advertising elasticity of good X is 2

% change in advertising expenses of good X = -4%

% change in the demand for good X = advertising elasticity of good X * % change in advertising expenses of good X = 2 * (-4%) = -8%

Ans: The change in consumption of good X = -8%

d.

Given,

Income elasticity of demand for good X = 1

% change in income = 4%

% change in the demand for good X = Income elasticity of demand for good X * % change in income = 1 * (4%) = 4%

Ans: The change in consumption of good X = 4%