Question

A measure of the responsiveness (or sensitivity) of consumer demand to changes in income is known as the

	a.	quasilinear income elasticity of price demand
	b.	income elasticity of factor substitution
	c.	income elasticity of demand
	d.	cross price elasticity of income demand

Your firm offers two core products: X and Y. The cross price elasticity of demand between X and Y is given as 0.15.

Which of the following statements is TRUE?

	a.	A 15% increase in the price of Y will increase the demand for X by 2.25%.
	b.	A 15% increase in the price of X will increase the demand for Y by 2.25%.
	c.	A 225% increase in the price of X will decrease the demand for Y by 15%
	d.	A 225% increase in the price of Y will decrease the demand for X by 15%.

Suppose the cross-price elasticity for two goods is negative. The two goods are

	a.	substitutes in consumption
	b.	complements in consumption
	c.	inferior goods
	d.	normal goods

Answer 1

(1) the change in demand caused by the change in income of consumer is measured by income elasticity of demand .thus, option c is correct.

(2) cross price elasticity shown the change in demand of good 1 due to change in price of good 2.

Cross price elasticity =%age change in Xdemand / % age change in price of Y

(a) 0.15 =%age X/0.15

% age change in demand of X =0.0225=2025%

Thus, option A is correct.

(3) A negative cross price elasticity implies that with increase in price of good 1 demand of other good decreases. This is clearly the vase of complementary goods. Because they are consumed together and with increase in price of good 1 the demand of other good would definitely fall. Thus, option B is correct.