Hi, ples help me with this problems with proper explaination Thanks Q2 a. As the

Question

Hi, ples help me with this problems with proper explaination Thanks

Q2 a. As the price of margarine rises by 20%, a manufacturer of baked goods increases its quantity of butter demanded by 5%. Calculate the cross-price elasticity of demand between butter and margarine. Are butter and margarine substitutes or complements for this manufacturer? b. After Malia’s income increased from $12,000 to $18,000 a year, her purchases of album downloads increased from 10 to 40 downloads a year. Calculate Malia’s income elasticity of demand for albums. c. Expensive restaurant meals are income-elastic goods for most people, including Sanjay. Suppose his income falls by 10% this year. What can you predict about the change in Sanjay’s consumption of expensive restaurant meals?

Explanation / Answer

2. a) Cross-price elasticity of demand between goods A and B

= % change in quantity of A demanded / % change in price of B

= 20/5

= 4

Butter and margarine are substitutes and may used as substitutes. When two goods are substitutes the cross-price elasticity of demand is positive.

2b) Malia’s income elasticity for demand for CD =

[(40-10)/(18000-12000)/]*[[(12000+18000)/2]/[(40+10)/2]] =[30/6000]*[7500/25] = 1.5. 2

2c) Sanjay's consumption of expensive restaurant meals will rise less than 10% hence it would be income elastic.

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