Question

1. Assume that if PY = 50, then QdX = 900, and if PY = 80, then QdX = 600. Use these two prices of good Y (PY) and the two quantities demanded of good X (QDX) to calculate the cross-price elasticity of the demand of good X when the price of good Y increases from 50 to 80.

-0.69

0.69

0.87

-0.87

2. Based on your answer to question 14, goods X and Y are:

inelastic
		complements
		inferior
		substitutes

3. The price elasticity of demand of good X is -0.5. An increase in the price of good X will

Decrease revenues for the suppliers of good X

Increase revenues for the suppliers of good X

Not affect revenues for the suppliers of good X

Increase or decrease revenues for the suppliers of food X

4. The price elasticity of demand of good X is -1.8. An increase in the price of good X will

Decrease revenues for the suppliers of good X

Increase revenues for the suppliers of good X

Not affect revenues for the suppliers of good X

Increase or decrease revenues for the suppliers of food X

5.

If the value of the price elasticity of X is -1.45, then a price decrease of X will

decrease revenues for the suppliers of X
		increase revenues for the suppliers of X
		will not affect revenues for the suppliers of X
		will increase or decrease revenues for the suppliers of X

Answer 1

1.Ans: -0.87

Explanation:

Cross elasticity of demand = ∆Q_x / ∆P_y  *( P_y1 + P_y2 / Q_x1 + Q_x2)

= {( 600 - 900) / ( 80 -50 ) } * {( 50 + 80 ) / ( 900 + 600)}

= ( -300 / 30 ) * ( 130 / 1500)

= -10 * 0.0867

= -0.867 or -0.87

2.Ans: complements

Explanation:

When the cross elasticity of demand is negative , the two goods are complements.

When the cross elasticity of demand is positive , the two goods are substitutes.

3.Ans: Increase revenues for the suppliers of good X

4.Ans: Decrease revenues for the suppliers of good X

5.Ans: Increase revenues for the suppliers of X

Explanation:

When demand is inelastic , then decrease in price will lead a decrease in total revenue. But when demand is inelastic , then increase in price will lead an increase in total revenue.

When demand is elastic , then decrease in price will lead an increase in total revenue. But when demand is elastic , then increase in price will lead a decrease in total revenue.