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 -3. 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 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 9 percent c. Advertising decreases by 2 percent d. Income Increases by 5 percent

Explanation / Answer

a.

Price-elasticity of demand = % change in quantity demanded / % change in price

   -3 = % change in quantity demanded / -7%

% change in quantity demanded = (-3) × (-7%)

                                               = 21%

Answer: The consumption of good X will be changed by 21%.

b.

Cross-price elasticity of demand = % change in demand X / % change in price Y

                                    2         = % change in demand X / 9%

Percentage change in demand X = 2 × 9%

                                                = 18%

Answer: The consumption of good X will be changed by 18%.

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