Question

You have hired a student intern to calculate some elasticity measures so that you can present the findings at a prestigious economics conference. For the measures that follow, provide a quick interpretation, and then determine whether you should trust the intern's work or not. After all, it will be you in front of that critical audience of professionals, not the intern.

A) “The income elasticity of demand for movie theater tickets is –1.5.”
  

B) “The price elasticity of demand for milk is 0.4 in the short run and 0.9 in the long run.”
  

C) “The cross-price elasticity of demand for Cheerios with respect to the price of Wheaties is –2.”

Answer 1

a) This statement is wrong. A negative income elasticity means that the product is inferior i.e. as the income increase the demand for the good decrease. A movie show should have a normal or a positive income elasticity as it is a luxury good.

b) True.

Milk is inelastic in the short run as the alternative are less and it will be more elastic in the long run as the options will be available like a fruit juice etc.

c) False

they are substitute so the cross price elasticity for the goods will be positive, complementary good have a negative price elasticity.