Question

Suppose the own price elasticity of demand for good X is -5, its income elasticity is 1, its advertising elasticity is 3, and the cross-price elasticity of demand between it and good Y is 4. Determine how much the consumption of this good will change if:

a) The price of good X decreases by 5 percent. _____%

b) The price of good Y increases by 8 percent. _____%

c) Advertising decreases by 2 percent. _____%

d) Income increases by 4 percent. _____%

Answer 1

Elasticity = change in quantity demanded (%) / change in price (%)

a) The price of good X decreases by 5 percent.

Quantity demanded changes by = -5 x -5 = 25% (increase)

b) The price of good Y increases by 8 percent.

Quantity demanded changes by = 8 x 4 = 22% (increase, the good Y is a substitute)

c) Advertising decreases by 2 percent.

Quantity demanded changes by = 3 x -2 = -6% (decrease)

d) Income increases by 4 percent.

Quantity demanded changes by = 4 x 1 = 4% (increase)