Question

1. Suppose the own price elasticity of demand for good X is -3, it's income elasticity is 1, its advertising elasticity is 2, and the cross-price elasticity of demand between it and good Y is -4, determine how much the consumption if this good will change if:
a) The price of good X decreased by 5%
b) The price of good Y increased by 8%
c) Advertising decreased by 4%
d) Income Increased by 4%
2. Suppose the cross price elasticity of demand between X and Y is 4, how much would the price of good Y have to change in order to increase the consumption of good X by 20%?

Answer 1

Answer:

A) X Demand fall 15% ; B) X Demand fall 32% ; C) X Demand fall 8% ; D) X Demand rise 4% . 2] Price (Y) rise 5%

Explanation:

Elasticity is the responsive change in demand of a good, due to any factor affecting it.

Elasticity = % change in demand / % change in factor affecting demand       So, % change in demand = % change in factor  x Elasticity

Given : Price Elasticity =  -3 , Income Elasticity = 1 , Advertising Elasticity = 2 , Cross Price Elasticity = -4

A) Price of good decrease by 5% : So, Demand would change by 5 x price elasticity, 5 x -3 i.e - 15% (demand fall)  

B) Price of good Y increase by 8% : So, X's Demand would change by 8 x -4 i.e - 32 % (demand fall)  

C) Advertising decreased by 4% : So, X's demand would change by -4 x 2 i.e - 8% (demand fall)  

D) Income increase by 4% : So, X's demand would change increase by 4 x 1 i.e 4% (demand rise)

2.  Cross Price Elasticity = 4 ; Desired change in quantity = 20% increase

Elasticity ( 4 ) = desired % change in demand (20%) / % change in Y price

% change in Y price = 20 / 4 = 5 % (price rise)