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Suppose the own price elasticity of demand for good X is -5, its income elasticity is -1, its advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is 3
Suppose the own price elasticity of demand for good X is -5, its income elasticity is -1, its advertising elasticity is 4, 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 6 percent.
percent
b. The price of good Y increases by 7 percent.
percent
c. Advertising decreases by 2 percent.
percent
d. Income increases by 3 percent.
percent
Expert Solution
Given,
Price elasticity of demand for good (X) = -5
Income elasticity = -1
advertising elasticity = 4
Cross-price elasticity of demand between it and good Y = 3
So,
a. The price of good X decreases by 6 percent.
ed = % change in Q / % change in variable
-5 = % change in Q/-6%
% change in Q = 30 percent
b. The price of good Y increases by 7 percent.
3 = % change in Q/7%
% change in Q = 21 percent
c. Advertising decreases by 2 percent.
4 = % change in Q/-2%
% change in Q = -8 percent
d. Income increases by 3 percent.
-1 = % change in Q/3
% change in Q = -3 percent.
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