Question

Q3: The following table shows the price of good J, the price of good K (which is related in some way to good J), average income, Q^D of good J and Q^D of good K for 5 periods. Use the information in the table to answer the following questions. Do not round your answers too early or your final result will be less accurate.

Period	Price of Good J	Price of Good K	Average Income	QD of Good J	QD of Good K
1	$16	$5	$36,000	320 units	350 units
2	$18	$8	$30,000	280 units	340 units
3	$20	$6	$30,000	250 units	400 units
4	$20	$6	$36,000	300 units	360 units
5	$20	$8	$30,000	270 units	380 units

e) Is good J an inferior good or a normal good? If good J is a normal good, is it a necessity or a luxury?

f) Is good K an inferior good or a normal good? If good K is a normal good, is it a necessity or a luxury?

g) Which two periods must you compare to calculate the cross-price elasticity of demand for good J with respect to the price of good K AND what does this cross-price elasticity of demand equal (to two decimal places)?

h) Which two periods must you compare to calculate the cross (price) elasticity of demand for good K with respect to the price of good J AND what does this cross elasticity of demand equal (to two decimal places)?

i) Are goods J and K complements in consumption, substitutes in consumption, complements in production or substitutes in production?

Answer 1

e) Income elasticity of demand for J =
So, it is a normal good as income elasticity is positive. So, it is a necessity as income income elatsicity is 1.

f)  Income elasticity of demand for K =

So, it is an inferior good as income elasticity is negative.

g) Period 3 and 5 must be compared because income and price of J is constant and only price of good K is changing.
Cross price elasticity of demand =

h) Period 2 and 5 must be compared because income and price of K is constant and only price of good J is changing.
Cross price elasticity of demand =

i) Goods J and K are substitutes in consumption as cross price elasticity is positive.