Suppose the own price elasticity of demand for good X is -3, its income elastici

Question

Suppose the own price elasticity of demand for good X is -3, its income elasticity is -2, its advertising elasticity is 3, and the cross-price elasticity of demand between it and good Y is -5. Determine how much the consumption of this good will change if:

Instructions: Enter your answers 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 8 percent.

c. Advertising decreases by 4 percent.

d. Income increases by 3 percent.

Explanation / Answer

(a)

Own price elasticity = -3, implying 1% decrease in price of X will increase its demand by 3%.

So, 7% decrease in its price will increase demand by 21%.

(b)

Cross price elasticity of X with Y is -5, implying 1% increase in price of Y will decrease demand for X by 5%.

So, 8% increase in price of Y will decrease demand for X by 40%.

(c)

Advertising elasticity is 3, impying 1% decrease in advertising will decrease demand by 3%.

So, 4% decrease in advertising will decrease demand by 12%.

(d)

Income elasticity is -2, implying 1% increase in income will decrease demand by 2%.

So, 3% increase in income will decrease demand by 6%.

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