Question

At least a paragraph for each question. make sure each question answered

a) What would happen to the market demand for the beer if the price of wine increased by 20%? You might want to distinguish between different types of beer. (Your answer should show you understand the concept of cross elasticity of demand.)

b) What would happen to the demand for fur coats if income went up by 20% What would happen to the demand for underwear if income went up by 20%. Again, you might want to distinguish different types of product within each catagory. (Your answers should reflect your knowledge of income elasticity of demand)

c) What would happen to the demand for fur coats if advertising for the product went up by 20% What would happen to the demand for underwear if advertising for the product went up by 20%. Again, you might want to distinguish different types of product within each catagory.

Answer 1

A) beer and wine are close substitute goods. Substitute goods are those goods which can be used in place of one another. Thus an increase in price of wine will decrease the demand of wine and should increase the demand of beer.And change in demand=cross elasticity of demand*20. Thus beer demand will increase and cross elasticity will have positive sign.

B)Income elasticity of demand is the %change in demand due to %change in income. Since fur coat is luxury which have income elasticity to be greater than 1, whereas underwear is necessity good which have income elasticity to be less than one. Thus demand of both good will increase but demand of fur coat will increaze more.

C)Demand of both the goods will increase because advertising will bring new consumer in the market for thses Goods and demand curve of both fur and underwear will shift to the right.