Question

Suppose the own price elasticity of demand for good X is -5, its income elasticity is -1, its advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is 3. Determine how much the consumption of this good will change if: Instructions: Enter your responses as percentages. Include a minus (-) sign for all negative answers.

a. The price of good X decreases by 6 percent.

percent

b. The price of good Y increases by 7 percent.

percent

c. Advertising decreases by 2 percent.

percent

d. Income increases by 3 percent.

percent

Answer 1

We know that

• own price elasticity of demand for good X = -5,
• income elasticity = -1,
• advertising elasticity = 4,
• cross-price elasticity of demand between it and good Y = 3.

a. The price of good X decreases by 6 percent.

We use the formula ed = % change in Q / % change in variable

-5 = % change in Q/-6%

% change in Q = 30 percent

b. The price of good Y increases by 7 percent.

3 = % change in Q/7%

% change in Q = 21 percent

c. Advertising decreases by 2 percent.

4 = % change in Q/-2%

% change in Q = -8 percent

d. Income increases by 3 percent.

-1 = % change in Q/3

% change in Q = -3 percent.