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Homework answers / question archive / Suppose the own price elasticity of demand for good x is -2, its income elasticity is 3, its advertising elasticity is 2, 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 -2, its income elasticity is 3, its advertising elasticity is 2, and the cross-price elasticity of demand between it and good y is -4. Determine how much the consumption of this goo will change if:
A. The price of good x decreases by 6 percent?
B. The price of good y increases by 8?
C. Advertising decreases b 4 percent?
D. Income increases by 5 percent?
A. The price of good x decreases by 6 percent?
Price elasticity of demand (PED) = percentage change in quantity / percentage change in price
But PED = -2
percentage change in price = -6%
hence
-2 = %change in quantity / -6%
%change in quantity = -2 * -6% = 12%
If price of good declines by 6%, Consumption will increase by 12%.
B. The price of good y increases by 8?
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 = 8%
Hence,
-4 = %Change in Quantity Demanded of Good x / 8%
%Change in Quantity Demanded of Good = -4 * 8% = -32%
C. Advertising decreases b 4 percent?
Advertising elasticity of demand (AED) = the percentage change in the quantity demanded / the percentage change in advertising expenditures
But
AED = 2
The percentage change in advertising expenditures = - 4%
2 = the percentage change in advertising expenditures / -4%
the percentage change in advertising expenditures = 2 * -4% = -8%
D. Income increases by 5 percent?
Income elasticity of demand (YED) = %change in demand / %change in income
But
YED = 3
%change in income = 5%
3 = %change in demand / 5%
%change in demand = 3 * 5% = 15%