Question

2. Suppose the own price elasticity of demand for good X is 2, its income elasticity is 3, and the cross price elasticity of demand between it and good Y is 6. Determine how consumption demand for the good will change if:

a) The price of good X increases by 5 percent. b) Consumer income falls by 3 percent.
c) The price of good Y increases by 10 percent. d) Is good Y a substitute or a complement?

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Answer 1

Given, price elasticity of demand = - 2

Income elasticity = 3

Cross price elasticity = -6 (Here I am not sure because I am getting to see a box in front of it).

a. Elasticity of demand is measured using the following formula

When price increases by 5%

b. Income elasticity is measured using the following formula

Consumers income fall by 3%

c. Cross elasticity of demand is measured using the following formula

% ∆ Py = 10%

d. If cross elasticity of demand between two goods is positive then the two goods are substitute to each other.

If the cross elasticity of demand is negative then the two goods are complement to each other.

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Note: If cross elasticity = 6, then

%∆Qx = 60% (Substitute).