In the following two panels, the demand for good x shifts due to a change in (pa
ID: 2505549 • Letter: I
Question
In the following two panels, the demand for good x shifts due to a change in (panel A) and change in the price of a related good Y (Panel B). Holding the price of good X constant at $50, calculate the following elasticities:
a. Panel A shows how the demand for X shifts when income increases from $30,000 to $34,000. Use the information in Panel A to calculate the income elasticity of demand for X. Is good X normal or inferior?
b. Panel B shows how the demand for X shifts when the price of related good Y increases from $60 to $68. Use the information in Panel B to calculate the cross-price elasticity. Are goods X and Y substitutes or complements?
In the following two panels, the demand for good X shifts due to a change in income (Panel A) and a change in the price of a related good Y (Panel B). Holding the price of good X constant at $50, calculate the following elasticities: Panel A Panel B Panel A shows how the demand for X shifts when income increases from $30,000 to $34,000. Use the information in Panel A to calculate the income elasticity of demand for X. Is good X normal or inferior? Panel B shows how the demand for X shifts when the price of related good Y increases from $60 to $68. Use the information in Panel B to calculate the cross-price elasticity. Are goods X and Y substitutes or complements?Explanation / Answer
income elasticity of demand for X = % change in quantity/ % change in income = [(300-200)/200]/[(34000-30000)/30000] = 3.75
as e>1, X is a Normal good
cross-price elasticity = % change in quantity/ % change in price = [(510-240)/240]/[(68-60)/60] = 8.4375
as e>0, X and Y are Substitutes
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