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

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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.