Question

. Suppose each of the following cases increases your quantity demanded for Good X by 20 percent. What can you determine about your demand for Good X from the information? a. The price of Good X decreases by 22 percent. b. The price of Good Y increases by 10 percent. c. Your income increases by 25 percent.

Answer 1

Ans) Percentage change in quantity demanded = + 20%

1) Own price elasticity = %change in quantity demanded of good X ÷ %change in price of good X

Own price elasticity = 20÷(-22) = -0.909 = -0.91

Since elasticity is less than 1, demand for good X is inelastic.

(If elasticity is more than 1 then demand is elastic)

2) Cross price elasticity = %change in quantity demanded of good X ÷ %change in price of good Y

Cross price elasticity = 20÷10 = 2

Since cross price elasticity is positive, good X and good Y are substitutes. Further, since elasticity is more, goods are strong substitutes.

(Cross price elasticity is negative for complementary goods)

3) Income elasticity of demand = %change in quantity demanded of good X ÷ %change in income

Income elasticity = 20÷25 = 0.8

Since income elasticity is positive, good is normal good. Further, since elasticity is less than 1, good is necessity.

(Income elasticity is negative for inferior goods. )