Question

Explain the concepts of own-price elasticity, cross-price elasticity and income elasticity of demand. State the factors that determine own-price elasticity of demand for a normal good

Answer #1

**Price elasticity of demand** is the relationship
between price and quantity demanded

It is given by the ratio of percentage change of quantity demanded to the percentage change in the price

It generally tellss that whether the good is a elastic, in elastic or unitelastic

**Cross price elasticity of demand** tells the
relationship between two type of foods that whether they are
complements or substitutes to each other

Complements are those which complete each other

For example pen and paper

Substitutes are those good which can replace each other

For example tea and coffee

If the value of cross price elasticity of demand is positive then the two goods are substitutes to each other

If the value of cross price elasticity of demand is negative then the two goods are complements to each other

**Income elasticity of demand** gives the
relationship between income level of a consumer and the quantity he
or she consumed

Income elasticity of demand is given as the ratio of percentage change of quantity demanded to the percentage change in the income of the consumer

It tells that whether the two goods are normal good or inferior goods

For normal good, the value of income elasticity of demand is positive

Inferior goods are those good in which as the income rises the quantity demanded by the consumer decreases

**Some of the factors that affect the price elasticity of
demand are-**

- Income level of consumers
- Timeperiod
- Nature of commodity
- Presence of substitutes order complements in the market
- Number of consumers of the users in the market

Using the concepts of price elasticity of demand (PED), cross
elasticity of demand (XED) and Income elasticity demand(YED)
discuss in details what kind of goods a cigarette with a price
elasticity of demand of -4

Question 4
a. Explain own price, cross price and income elasticities of
demand and how they are measured.
b. Suppose the demand function facing a company manufacturing a
particular product (X) is given by
Qx = 62 -2Px + 0.2M + 25A
Where:
Px is the price of the product
M is the consumer income, and
A is the amount of advertising expenditure.
If Px is 4, M is 150 and A is 4
You are required to calculate:
i....

Determine the price elasticity of demand, the cross-price
elasticity of demand or the income elasticity in the following
scenarios.
a. Consider the market for coffee. Suppose the price rises from
$4 to $6 and quantity demanded falls from 120 to 80. What is price
elasticity of demand? Is coffee elastic or inelastic?
b. John’s income rises from $20,000 to $22,000 and the quantity
of hamburger he buys each week falls from 2 pounds to 1 pound. What
is his income...

Suppose the own price elasticity of demand for good X is -5, its
income elasticity is 1, its advertising elasticity is 3, and the
cross-price elasticity of demand between it and good Y is 4.
Determine how much the consumption of this good will change if:
a) The price of good X decreases by 5 percent.
_____%
b) The price of good Y increases by 8 percent.
_____%
c) Advertising decreases by 2 percent. _____%
d) Income increases by 4...

explain the elasticity measures: own price elasticity,
cross-price elasticity, and income elasticity, and how
managers use each measure.

Suppose the own price elasticity of demand for good X is -3, its
income elasticity is -2, its advertising elasticity is 4, and the
cross-price elasticity of demand between it and good Y is -2.
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 7 percent.
b. The price of good Y increases by 10...

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...

Suppose the own price elasticity of demand for good X is -2, its
income elasticity is -1, its advertising elasticity is 2, 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 4 percent. percent
b. The price of good Y increases by...

2. Calculate price elasticity of demand, cross price elasticity
of demand and income price elasticity of demand. Then indicate
whether the alternative good is a complement or substitute. P =10,
PA=20, and I =100.
a) Q = 500 - 3P + 4PA + I (I stands for income)
b) Q = 100 - 0.1P - 0.5PA - 0.2I

The own-price elasticity of demand for hospital services in the
area equals –0.25, the income elasticity of demand equals 0.45, the
cross-price elasticity demand for hospital services with respect to
the price of nursing home services equals –0.1, and the elasticity
of travel time equals –0.37. Use this information to answer the
following question.
Hospital services are an inferior good.
True or false?

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