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

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%

• If price decreases by 4%, Consumption will increase by 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%

• Percentage change in Quantity Demanded of Good = 4 * 9% = 36%

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%

• The percentage change in the quantity demanded = 4 * -2% = -8%.

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%

• Percentage change in quantity demanded = 3 * 3% = 9%.