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Homework answers / question archive / Suppose the own price elasticity of demand for good X is -4, its income elasticity is 3, its advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is 4
Suppose the own price elasticity of demand for good X is -4, its income elasticity is 3, its advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is 4. Determine how much the consumption of this good will change if:
Instructions: Enter your answers as percentages. Include a minus (-) sign for all negative answers.
a. The price of good X decreases by 4 percent.
b. The price of good Y increases by 9 percent.
c. Advertising decreases by 2 percent.
d. Income increases by 3 percent.
a. The price of good X decreases by 4 percent.
Price elasticity of demand (PED) = percentage change in quantity / percentage change in price
But PED = -4
percentage change in price = -4%
hence
-4 = %change in quantity / -4%
%change in quantity = -4 * -4% = 16%
b. The price of good Y increases by 9 per cent.
Cross Price Elasticity of Demand (XED) = %Change in Quantity Demanded of Good x / %Change in Price of Good Y
But XED = 4
%Change in Price of Good Y = 9%
Hence:
4 = %Change in Quantity Demanded of Good x / 9%
c. Advertising decreases by 2 percent.
Advertising elasticity of demand (AED) = the percentage change in the quantity demanded / the percentage change in advertising expenditures
But:
AED = 4
The percentage change in advertising expenditures = - 2%
4 = the percentage change in the quantity demanded / -2%
d. Income increases by 3 percent.
Income elasticity of demand (YED) = percentage change in quantity demanded / percentage change in income
But
YED = 3
%change in income = 3%
3 = %change in demand / 3%
