Question

1. Barron used to make $2,500 a month and eat sushi
three times per month. Now he is making $3,500 a
month and is eating sushi seven times per month. Wh
at is Barron’s income elasticity of demand for
sushi? For Barron, is sushi 1) a normal good or an
inferior good, and 2) a necessity or a luxury?

2. Netflix raises the price of its service from $11
per month to $14 per month. This causes the number
of people subscribing to HCCCtinder – a school-specific dating app – to rise from 2,200 to 2,500. What is the cross-price elasticity of demand? Based upon your answer, are Netflix and HCCCtinder substitutes or compliments?

3. Identify and explain three of the factors that help determine how elastic demand for a particular good
is. Discuss how the factors you select would help explain the price elasticity of demand for a sweater
from Banana Republic.

Answer 1

1. The income elasticity would be the ratio of percentage change in quantity and percentage change in income, ie or or or or . This means that for a unit percent increase in income, the quantity demanded increased by 3.333%. As the elasticity is positive, it is a normal good, and since it is greater than 1, it is a luxury good.

2. The cross price elasticity of demand would be or or or or . This means that for a unit percent increase in price of Netflix, the demand for HCCCTinder increases by 0.5%. A positive cross price elasticity would mean that both are substitutes. As the price of Netflix increase, the demand for it would decrease, and a decrease in demand for Netflix is met by an increase in demand for HCCCTinder, meaning that both goods are substitutes of each other.

3. The three factors would be as below.

• Nature of the Product - The nature is the basic property of product determining its elasticity, which is basically the type and necessity of the usage of the product. For example, an important medicine is crucial for health, and one should expect not much response in quantity demanded for change in its price, and one may not expect the same response for the bread-butter kind of goods.
• Number of Uses - A product may have several uses, or only one, and elasticity depends on that. The silver is useful in industrial as well as decorative and luxurious purposes, and it would be more elastic than a commodity that has only one use, like shirt.
• Number of Substitutes - If a product have many substitutes, it would be more elastic or responsive towards price change than a product that do not have a substitute. A particular deodorant would have substitutes of other deodorants, and it would be more elastic than a particular high range smartphone.

Banana Republic, yet is not a highly expensive brand, but is definitely a mid-range old brand. A sweater from there would be a good quality sweater, but may be not as good as high-end brand. It would have only one usage. Also, the substitute would include low and high brand products. As the product is a from a mid-range brand, have limited close substitutes, it would be a luxurious good, having elasticity greater than 1, but since have only one use, it would be not far greater than, but close to 1.