3. Elasticity-time! Calculate the elasticity implied by the information given (o

Question

3. Elasticity-time! Calculate the elasticity implied by the information given (own-price, cross-price, or income), interpret the elasticity (“For a one percentage point change in…”), and tell me what the elasticity implies about the good or goods.

a) When the price of soft drinks increases by 10 percent, quantity demanded falls 8 percent.

b) Quantity demanded of good X increases 12 percent when the good Y’s price decreases 6 percent.

c) When income goes up 1 percent, quantity demanded of fine wines increases 1.5 percent.

Explanation / Answer

a.)Own price elasticity of demand =(% change in quantity demanded)/(%change in price)

= - 8/10=-0.8

It implies if price rises by one percentage point, quantity demanded falls by 0.8%

It measures responsiveness of quantity demanded of a good due to change in its price.

b.)Cross price elasticity=(% change in quantity demanded of a good)/(% change in price of other good)

=12/(-6)=-2

It implies if price of good Y decreases by one percentage point,quantity demanded of good X rises by 2%.It implies X and Y are perfect complements.

It measures responsiveness of quantity demanded of a good due to change in price of other good.

c.)Income elasticity of demand=(% change in quatity demanded of a good)/(% change in income)

=1.5/1=1.5

It implies when income rises by one percentage point,quantity demanded rises by 1.5 percentage points.

It measures responsiveness of quantity demanded of a good due to change in income.

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