3. Hin: See pp. 100-101 in Chapter 5 of the course text book. Which good do you

Question

3. Hin: See pp. 100-101 in Chapter 5 of the course text book. Which good do you expect to have a greater income elasticity of demand milk or wine? Expla in your reasoning. [b] Assume the cross-price elasticity of demand value between sauce A and sauce B is-0.3. Based on this information, are the two sauces complements or substitutes? 4. If supply of a good is price inelastic and demand for the good increases, will market equilibrium increase by a relatively small or relatively large amount? price Hint: See pp.101-104 in Chapter 5 of the course text book.

Explanation / Answer

(a) Milk is a necessary good and wine is a luxury good as compared to milk. The elasticity of demand for luxury goods is higher than the elasticity of demand for necessary goods. Therefore, the wine will the have a greater elasticity of demand than milk.

(b) The goods are complements. In case of complements, the demand of one good declines with the rise in the price of another good. So, cross elasticity of demand for complementary goods is negative. The cross-price elasticity of substitutes is positive.

(c) The equilibrium price will rise by relatively large amount. Since the good has inelastic supply, there will be relatively less increase in supply due to the price increase. So, when demand increases, supply will increase relatively less and the price will increase relatively more.

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.