Question

You have the following information on the price elasticities of the demands for goods Y and X:

Goods             Price elasticity             Cross-price elasticity               Income elasticity

X                           0.4                                  -0.7                                           -1.8

Y                           0.9                                  -0.7                                           0.6

Fill out the spaces in the following statements:

Consider good Y. A decrease in the price of good Y will ________ total revenues.

Based on the price elasticity, we can say that good X is price ______

Based on the cross-price elasticity, we can say that goods X and Y are _____

Based on the income elasticity, we can say that good Y is ______

A 10% increase in income will _______ the sales of good X ____%

Answer 1

ANswer
Consider good Y. A decrease in the price of good Y will decrease total revenues.
as the price elasticity of good y is less than 1 means it is inelastic so decrease the price of inelastic good decreases revenue
ex. 10% decreases in price increases quantity by 9%, and the revenue decreases because the proportionate change in quantity is lower than the price
TR=P*Q

Based on the price elasticity, we can say that good X is price inelastic.
as the price elasticity of good y is less than 1 means it is inelastic

Based on the cross-price elasticity, we can say that goods X and Y are complements
because the cross-price elasticity is negative

Based on the income elasticity, we can say that good Y is normal good
the income elasticity of good y is positive so the good is normal

A 10% increase in income will decrease the sales of good X by 18%

income elasticity of demand=%change in quantity/%change in price
-1.8=%change in quantity/10
%change in quantity=-18%

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