Question

2. What is the income elasticity of demand? How can it be used to determine whether a good is a normal good or an inferior good? What is the cross-price elasticity of demand? How can it be used to determine whether two goods are substitutes or compliments?

Answer #1

Income elasticity of demand is defined as the degree of responsiveness in quantity demand for a good due a change in income of the consumer. It can be calculated as:

IED = % change in quantity demanded of a good / % change in income of the consumer

A positive income elasticity of demand is associated with normal goods, where as a negative income elasticity of demand is associated with inferior goods.

Cross-price elasticity of demand is defined as the degree of responsiveness in quantity demand for one good (good X) due a change in the price of another good (good Y).

It can be calculated as:

CPED = % change in quantity demanded for a good X / % change in the price of good Y

A positive cross-price elasticity of demand is associated with substitute good, where as a negative cross-price elasticity of demand is associated with complementary good.

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,...

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

Determine the price elasticity of demand, the cross-price
elasticity of demand or the income elasticity in the following
scenarios.
a. Consider the market for coffee. Suppose the price rises from
$4 to $6 and quantity demanded falls from 120 to 80. What is price
elasticity of demand? Is coffee elastic or inelastic?
b. John’s income rises from $20,000 to $22,000 and the quantity
of hamburger he buys each week falls from 2 pounds to 1 pound. What
is his income...

40) The cross elasticity of demand for butter and margarine is
likely to be A) positive because they are substitutes.
B) positive because they are complements.
C) negative because they are substitutes.
D) negative because they are complements.
E) positive because they are normal goods.
41) If an increase in the price of green ketchup increases the
demand for red ketchup, then
A) red and green ketchup are substitutes.
B) red and green ketchup are normal goods.
C) the cross...

1) The income elasticity of demand for Good Z is –0.2, while the
cross-price elasticity of demand between Good Z and Good Y is 1.63.
Which of the following statements is correct regarding Good Z?
Group of answer choices
Good Z is a inferior good, and Goods Z and Y are
complements.
Good Z is an inferior good, and Goods Z and Y are
substitutes.
Good Z is a normal good, and Goods Z and Y are complements.
Good Z...

what is income elasticity of demand amd how is it measured ? how
does income elasticity of demand tell you whether a good is
inferior or normal ? give examples

The price elasticity of demand uses the absolute value because
it is sometimes negative or always negative
.The income and cross elasticities of demand do not use the
absolute value because they can be negative only, positive
only or positive or negative
The income elasticity of demand is positive for a normal
or inferior good and negative for an inferior or
normal good.
The cross-price elasticity of demand is positive for
complementary or substitute goods and negative for
complementary or...

The price elasticity of demand for gas is -0.4 in the short
run. Which is most likely the price elasticity of demand for gas in
the long run?
-0.2
0
-0.4
-0.9
The income elasticity of demand for Organic Fruit is 1.4. Which
of the following is an appropriate interpretation of this
elasticity:
Higher income households buy more organic fruit and organic
fruit is a normal good.
Higher income households buy more organic fruit and organic
fruit is an inferior...

For each scenario, calculate the income elasticity of demand,
determine whether the good is inferior or normal, and classify the
good's income elasticity. When calculating the income elasticity of
demand, use the midpoint formula. Round your answers to the nearest
hundredth.
Sylvia's annual salary increases from $100,000 to $109,500, and
she decides to increase the number of vacations she takes per year
from three to four. Calculate her income elasticity of demand for
vacations.
income elasticityvacations=
Vacations are a
normal...

A study reports that the estimated cross price elasticity of
demand between lettuce and tomatoes is -1.1 and the estimated
income elasticity of demand for lettuce is 0.4. Which of the
following is true?
Group of answer choices
Tomatoes and lettuce are substitutes, and lettuce is a normal
good
Tomatoes and lettuce are substitutes, and lettuce is an inferior
good.
Tomatoes and lettuce are complements, and lettuce is a normal
good.
Tomatoes and lettuce are complements, and lettuce is an...

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