In: Economics
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.
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.
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.