Question

Consider a market demand curve, in which the quantity demanded is on the horizontal axis and the price is on the vertical axis. If the demand curve is flat, then the price elasticity of demand is high in the absolute value. True or False?

The cross-price elasticity of Good X with respect to Good Y is estimated as -0.8. When the price of Good Y suddenly increases, we expect the demand for Good X will decrease. True or False?

We observe the income elasticity for Good X is -1.2. If the government provides extra income to everyone, then we expect the sales of Good X will increase. True or False?

Answer 1

ANSWER-

1# Consider a market demand curve, in which the quantity demanded is on the horizontal axis and the price is on the vertical axis. If the demand curve is flat, then the price elasticity of demand is high in the absolute value. - TRUE because a flat demand shows that when price changes by low percent it causes the demand to change by higher percent which shows there is high elasticity for demand as elasticty measures the response of demand with change in price.

2# The cross-price elasticity of Good X with respect to Good Y is estimated as -0.8. When the price of Good Y suddenly increases, we expect the demand for Good X will decrease. - TRUE becuase a negative cross price elastcity of demand shows the goods consumed are complementray goods and in case of complementary goods if price of one rises the demand for the other good falls as they are consumer together because of this inverse realation the cross price elasticty of demand is negative.

3# We observe the income elasticity for Good X is -1.2. If the government provides extra income to everyone, then we expect the sales of Good X will increase - FALSE because negative income elasticty of demand shows the good consumed is inferior good and in case of inferior good when income increases the demand for inferior good falls. So, If the government provides extra income to everyone, then we expect the sales of Good X will decrease.