Question

You have the following information for your product: Ped = -1.70 Ied = 1.5 Ced =...

You have the following information for your product:

Ped = -1.70

Ied = 1.5

Ced = -1.5

What can you determine about consumer demand for your product given this information (interpret each of these elasticities)

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Answer #1

Given price elasticity = -1.70, this means that an increase in price of a commodity will lead to a fall in demand by a greater multiple. Hence the demand curve is downward sloping and the slope is flatter.

Increase in income will lead to an increase in demand for the commodity (since elasticity of income demand = +1.5) This shows that the commodity is a normal good.

The cross price elasticity of demand is negative i.e. -1.5. Thus, a rise in price of good x will lead to a fall in demand for good Y i.e. the two goods are complements.

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