Question

Suppose the own price elasticity of demand for good X is -2, its income elasticity is 3, its advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is -6. 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 5 percent.

______ percent

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

_______ percent

c. Advertising decreases by 2 percent.

______ percent

d. Income increases by 3 percent.
_______ percent

Answer 1

(a)

It is given that own price elasticity of demand is -2. This means 1% decrease in price of X will result in increase in consumption of X by 2% => 5% decrease in price of X will result in increase in consumption of X by 2*5 = 10%

The correct answer is 10 percent

(b)

It is given that Cross price elasticity of demand is -6. This means 1% change in price of Y will result in increase in consumption of X by -6% => 10% Increase in price of X will result in change in consumption of X by -6*10 = -60%

Here negative sign implies that it will decrease

The correct answer is -60 percent

(c)

It is given that advertising elasticity of demand is 4. This means 1% decrease in advertising will result in Change in consumption of X by -4% => 2% Increase in advertising will result in change in consumption of X by -4*2 = -8%

Here negative sign implies that it will decrease

The correct answer is -8 percent

(d)

It is given that income elasticity of demand is 3. This means 1% decrease in income will result in Change in consumption of X by 3% => 3% Increase in income will result in change in consumption of X by 3*3 = 9%

The correct answer is 9 percent