Question

Price Elasticity of Demand for good X: −0.34

Income Elasticity of Demand for good X: 0.56

Cross Price Elasticity of Demand for goods X and Y: 0.04

Given the information above, determine the following:

1. whether good X is elastic, unit elastic, or inelastic

2. whether good X follows the “law” of demand

3. whether good X is normal or inferior

4. whether good X is a luxury or a necessity

5. whether good X and good Y are complements, substitutes, or neither

Answer #1

**Given:**

Price Elasticity of Demand for good X: −0.34

Income Elasticity of Demand for good X: 0.56

Cross Price Elasticity of Demand for goods X and Y: 0.04

---

**Answers:**

1. Good X has **inelastic** demand. This is because
the absolute value of Ed is less than 1.

2. **Yes**, good X follows the “law” of demand. As
Ed is negative - as price of X rises, the Qd falls.

3. Good X is a **normal** good. This is because
income elasticity is positive (greater than 1).

4. Good X is a necessity. This is because its demand is inelastic, as Ed is less than 1.

5. Good X and good Y are **substitutes**. The cross
price elasticity is positive. As the price of X rises, the Qd of Y
rises, and vice versa.

If the cross-price elasticity of demand between two goods is
-0.5, two goods are __________. If the income elasticity of a good
is -2, that good is a ___________.
Substitutes: Normal good
Complements: Inferior
Complements: Necessity
Substitutes: Luxury

Suppose that the demand function for good x is given by
x = 10 - 2px + py + 0.5M, where
M=10 is income and px = 2 and py =
5.
(a) Calculate the own price elasticity of demand.
(b) Calculate the cross price elasticity of demand. Are the
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(c) Is the good normal or inferior? Calculate the income
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(d) Is the good a necessity or a luxury?

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b.
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Cross-price elasticity of
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A. beer and wine are complements and wine is a luxury
good
B. beer and wine are substitutes and wine is a luxury
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C. beer and wine are complements and wine is an inferior
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D. beer and wine are substitutes and wine is an inferior
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QD of Good J
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