Question

# a) Using the percentage change method, calculate the cross elasticity if the price of margarine falls...

a) Using the percentage change method, calculate the cross elasticity if the price of margarine falls from \$2 to \$1.60 and the quantity of butter demanded falls from 500 to 450. Are these two products substitutes or complements? b) If the income elasticity of a product is 2, how much would income need to change for quantity to increase by 20%? Is this a normal or inferior good?

Cross price elasticity is measured by CPED = % change in Qd / % change in P = (450 - 500)*100/500 divided by (1.60 - 2.00)*100/2.00 = -10%/-20%. = 0.5. Since price fall causes quantity demanded to fall, the two products are positively related so these are substitutes

Income elasticity = % change in Q/ % change in income

2 = 20%/% change in income

% change in income = 20/2 = 10%. Income should increase by 10%. SInce income elasticity is positive it is a normal good.

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