Question

You are told that the price elasticity of demand for widgets is -0.75, the income elasticity of widgets is 2, and the cross-price elasticity of widgets and gadgets is 4. Carefully explain what information you can gather from each of these figures.

Answer 1

Answer : 1) For inelastic demand the price elasticity of demand is less than 1. Here given that "the price elasticity of demand is -0.75 for widgets". This indicates that the demand for widgets is inelastic.

2) For normal good the income elasticity of demand is positive. Because for normal good if consumers' income increase then the consumer purchase more. Here given that "the income elasticity for widgets is 2" which is positive. This indicates that widgets is a normal good.

3) For substitute goods the cross price elasticity of demand is positive. Here given that "the cross price elasticity for widgets and gadgets is 4" which is positive. This indicates that widgets and gadgets are substitute goods.

So, based on given data I can gather above written information.