Question

The table below provides information regarding price elasticities, income elasticities and cross-price elasticities of demand.

Answer the following questions by using the information from this table.

Commodity	Price Elasticity	Income Elasticity	Price change in this commodity	Cross-price Elasticity
Electricity (at home)	0.15	0.25	Natural Gas	0.35
Restaurant Meals	1.9	2.5	----	----
Coffee	0.25	-----	Milk	-0.15
Bread	0.20	-0.10	----	----

a. Which commodities are normal and which are inferior?

b. Which commodities are complements and which are substitutes?

c. Which commodities have elastic and which have inelastic demands?

d. What will happen to the total revenue of bread if its price increases? Why?

e. What will happen to the quantity demanded of coffee if the price of milk increases by 1%?

Answer 1

a. Commodities are normal if the income elasticity is positive and inferior if the income elasticity is negative. So, electricity and restaurant meals are normal commodities whereas bread is an inferior commodity.

b. Commodities are substitutes if cross price elasticity is positive and complements if cross price elasticity is negative. So, coffee and milk are complements whereas electricity and natural gas are substitutes.

c. Demand is elastic if price elasticity is greater than 1 and inelastic if price elasticity is less than 1. So, restaurant meals have elastic demand whereas electricity, coffee, and bread have inelastic demand.

d. Total revenue of bread will increase if its price increases because its demand is inelastic.

e. Cross-price elasticity of coffee = Percentage change in quantity demanded of coffee/Percentage change in price of milk
So, Percentage change in quantity demanded of coffee = Percentage change in price of milk*Cross-price elasticity of coffee = (1%)*(-0.15) = -0.15%
So, quantity demanded of coffee will decrease by 0.15% if the price of milk increases by 1%.