Question

Suppose the own price elasticity of demand for good X is -5, its income elasticity is 2, its advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is 3. 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 9 percent.

percent

c. Advertising decreases by 3 percent.

percent

d. Income increases by 2 percent.
percent

Answer 1

(a) % change in price of good x = -5%

Own price elasticity of demand = (% change in quantity of good X/ % change in price of good X) = -5

(% change in quantity of good X/ -5%)= -5

% change in quantity= (-5)(-5)= 25%

This implies that consumption of good X will increase by 25%.

(b) % change in price of good Y= 9%

Cross price elasticity of demand = (% change in quantity of good X/ % change in price of good Y) = 3

(% change in quantity of good X/ 9%)= 3

% change in quantity= (3)(9)= 27%

This implies that consumption of good X will increase by 27%.

(c) % change in advertising = -3%

Advertising elasticity of demand = (% change in quantity of good X/ % change in advertising) = 4

(% change in quantity of good X/ -3%)= 4

% change in quantity= (4)(-3)= -12%

This implies that consumption of good X will decrease by 12%.

(d) % change in income= 2%

Income elasticity of demand = (% change in quantity of good X/ % change in income) = 2

(% change in quantity of good X/ 2%)= 2

% change in quantity= (2)(2)= 4%

This implies that consumption of good X will increase by 4%.