Question

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 percent.

c. Advertising decreases by 2 percent.

d. Income increases by 4 percent.

Answer 1

a.

Own-price elasticity = % Change in X’s consumption / % change in X’s price

-3 = % Change in X’s consumption / -7%

% Change in X’s consumption = -3 × -7%

% Change in X’s consumption = 21% (Answer)

b.

Cross-price elasticity = % Change in X’s consumption / % change in Y’s price

-2 = % Change in X’s consumption / 10%

% Change in X’s consumption = -2 × 10%

% Change in X’s consumption = - 20% (Answer)

c.

Advertising elasticity = % Change in X’s consumption / % change in advertising expenditure

4 = % Change in X’s consumption / - 2%

% Change in X’s consumption = 4 × -2%

% Change in X’s consumption = - 8% (Answer)

d.

Income elasticity = % Change in X’s consumption / % change in income

-2 = % Change in X’s consumption / 4%

% Change in X’s consumption = -2 × 4%

% Change in X’s consumption = - 8% (Answer)