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 1, its advertising elasticity is 2, and the cross-price elasticity of demand between it and good Y is -4. 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 5 percent. percent b. The price of good Y increases by 8 percent. percent c. Advertising decreases by 4 percent. percent d. Income increases by 4 percent. percent

Explanation / Answer

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

its income elasticity is 1,

its advertising elasticity is 2, a

cross-price elasticity of demand between it and good Y is -4.

a. The price of good X decreases by 5 percent.

b. The price of good Y increases by 8 percent.

c. Advertising decreases by 4 percent.

d. Income increases by 4 percent.

Use the own price elasticity of demand formula to write %Q X d / (-5) = -3.

Solving, we see that the quantity demanded of good X will change by 15 percent if the price of good X decreases by 5 percent.

b. Use the cross-price elasticity of demand formula to write %Q X d / (8) = -4. Solving, we see that the demand for X will change by -32 percent if the price of good Y increases by 8 percent.

c. Use the formula for the advertising elasticity of demand to write %Q X d / (-4) = 2. Solving, we see that the demand for good X will change by -8 percent if advertising decreases by 4 percent.

d. Use the income elasticity of demand formula to write %Q X d / (4) = 1. Solving, we see that the demand of good X will change by 4 percent if income increases by 4 percent

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