Suppose the own price elasticity of demand for good X is -2, its income elastici

Question

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 answers 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 8 percent.

percent

c. Advertising decreases by 3 percent.

percent

d. Income increases by 5 percent.
percent

Explanation / Answer

a) Use the own price elasticity of demand formula to write %QXd/ (-4) = -2. Solving, we see that the quantity demanded of good X will change by 8 percent if the price of good X decreasesby 4 percent.

b) Use the cross-price elasticity of demand formula to write %QXd/ (8) = -3. Solving, we see that the demand for X will change by -24 percent if the price of good Y increases by 8 percent.

c) Use the formula for the advertising elasticity of demand to write %QXd/ (-3) = 2. Solving, wesee that the demand for good X will change by -6 percent if advertising decreases by 3 percent.

d) Use the income elasticity of demand formula to write %QXd/ (5) = -1. Solving, we see thatthe demand of good X will change by -5 percent if income increases by 5 percent.

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