Question

Suppose the own price elasticity of demand for good X is -3, its income elasticity is -2, its advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is -2. Determine how much the consumption of this good will change if: Instructions: Enter your responses as percentages. Include a minus (-) sign for all negative answers. a. The price of good X decreases by 7 percent. percent b. The price of good Y increases by 10 percent. percent c. Advertising decreases by 2 percent. percent d. Income increases by 4 percent. percent Prev

Answer 1

Answer:

a. 21 percent

b. -20 percent

c. -8 percent

d. -8 percent

Explanation:

Own price elasticity = -3

Income elasticity = -2

Advertising elasticity= 4

Cross price elasticity = -2

Formula for elasticity is given by,

$Elasticity = \frac{Percentage change in Quantity}{Percentage change in factor}$

a. When price of good X decreases by 7 percent.

$Elasticity = \frac{Percent change in quantity}{Percent change in own price}$

$-3 = \frac{Percent change in quantity}{-7}$

$Percent change in quantity = (-3) * (-7) = 21$

Thus, as price decreases by 7% quantity rises by 21%.

b. The price of good Y increases by 10 percent.

$Corss- price elasticity = \frac{Percent change in quantity}{Percent change in Price of good Y} \\ -2 = \frac{Percent change in quantity }{10} \\Percent change in quantity = (-2) * (10) \\ = -20$

Thus, as price of good Y increases by 10 percent, demand for good X falls by 20 percent.

c. Advertising decreases by 2 percent.

$Elasticity = \frac{Percent change in quantity}{Percent change in advertising} \\4 = \frac{Percent change in quantity }{-2} \\Percent change in quantity = (-2) * (4) \\ = -8$

Thus, a 2 percent decline in advertising will lead to a 8 percent fall in quantity of good X.

d. Income increases by 4 percent.

$Income elasticity = \frac{Percent change in quantity }{Percent change in income}\\-2 = \frac{Percent change in quantity}{4} \\Percent change in quantity = (-2) * (4) \\ = -8$

Thus, when income increases by 4 percent, quantity decreases by 8 percent.