Question 12 [5 points] a) Given that the cross elasticities of demand for produc

Question

Question 12 [5 points]
a) Given that the cross elasticities of demand for products A and B is 0.0 and for products C and D is 10.5. What can you conclude about the relationship between products A and B? products C and D? Products A and B are complement goods while products C and D are substitute goods.
Products A and B are normal goods while products C and D are inferior goods.
Products A and B are independent goods while products C and D are substitute goods.
Products A and B are inferior goods while products C and D are normal goods.

b) Suppose that the income elasticities of three goods have been estimated to be 4.50, 5.50 and 1.50, respectively. Interpret these coefficients. The three goods are all normal goods.
The three goods are all inferior goods.
The three goods are all substitutes.
Can not be determined with the information given.

Explanation / Answer

a Cross Elasticities of Demand for A & B is 0. Hence they are inependent goods. Cross Elasticities of Demand for A & B is10.5 which is greater than 1.Hence, they are substitutes. Hence, Product A and B are independent goods while Products C & D are substitute goods. b All the three income elasticities are positive and also greater than 1 Hence , the three goods are normal goods.

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