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

ANSWER-

A.) Price elasticity of demand - It is calculated as percent change in quantity demanded/percent change in price.

Given in question price elasticity of demand = -2,  price of good X decreases by 4 percent ( % change in price)

So, price elasticity of demand = percent change in quantity demanded/percent change in price

-2 = percent change in quantity demanded/ 4

perecnt cahnge in quantity demanded = 2*4 = 8%.

Hence, When the price of good X decreases by 4 percent the quantity demanded increases by 8%.

B.) Cross price elasticity of demand - It is calculated as perecnt change in quantity demanded of good X/ perecnt change in price of good Y.

Given in question cross-price elasticity of demand between it and good Y is -3, price of good Y increases by 10 percent

So, cross price elasticity of demand = perecnt change in quantity demanded of good X/ perecnt change in price of good Y.

-3 = perecnt change in quantity demanded for good X/ 10

percent change in quantity demanded = 3*10 = 30%

Hence, When the  price of good Y increases by 10 percent the quantity demaned for good X decreases by 30%.

C.) Advertising elasticity of demand - It is calculated as percent change in quantity demanded/ percent change in advertising price.

Given in question, advertising elasticity is 2, Advertising decreases by 3 percent

So, adevertising elasticity of demand = percent change in quantity demanded/ percent change in advertising price

2 = percent change in quantity demanded/ 3

percent change in quantity demand = 2*3= 6%

Hence, When the Advertising decreases by 3 percent the quantity demanded decreases by 6%.

D.) Income elasticity of demand - It is calculated as percent change in quantity demanded/ perecnt change in income.

Given in question, income elasticity is -1, Income increases by 2 percent

So, income elasticity of demand = percent change in quantity demanded/ percent change in income

-1 = percent change in quantity demanded/ 2

percent change in quantity demanded = 1*2 = 2%.

Hence, when the Income increases by 2 percent the quantity demanded decreases by 2%.