Question

Suppose the own price elasticity of demand for good X is -2, its income elasticity is -1, its advertising elasticity is 2, and the cross-price elasticity of demand between it and good Y is -3. Determine how much the consumption of this good will change if:

Instructions: Enter your responses as percentages. Include a minus (-) sign for all negative answers.

a. The price of good X decreases by 4 percent.

percent

b. The price of good Y increases by 10 percent.

percent

c. Advertising decreases by 3 percent.

percent

d. Income increases by 2 percent.
percent

Answer 1

(a)

The price of good X decreases by 4 percent.

The price elasticity of demand for good X = -2

% change in the quantity demand of good X/ % change in the price of good X =-2

% change in the quantity demand of good X/ - 4% =-2

% change in the quantity demand of good X =-2* -(4%)

=+8%

Hence the quantity demand of good X increases by 8%.

(b)

The price of good Y increases by 10 percent.

The cross-price elasticity of demand between it and goodY = -3

% change in the quantity demand of good X/ % change in the price of good Y = -3

% change in the quantity demand of good X/ 10% = -3

% change in the quantity demand of good X= -3* 10%

=(-)30%

Hence the quantity demand of good X decreases by 30%.

(c)

Advertising decreases by 3 percent.

The advertising elasticity of good X = 2

% change in the quantity demand of good X / % change in the Advertising = -2

% change in the quantity demand of good X / -3% = -2

% change in the quantity demand of good X = -2*(-3%)

=6%

Hence with the decrease in the advertising the quantity demand of good X increase by 6%.

(d)

Income increases by 2 percent.

income elasticity =-1

% change in the quantity demand of good X / % change in the income = -1

% change in the quantity demand of good X / 2% = -1

% change in the quantity demand of good X = -1*2%

=(-)2%

Hence the quantity demand of good X decreases by 2%.