Question

Suppose the own price elasticity of demand for good X is -3, its income elasticity is -2, its advertising elasticity is 3, and the cross-price elasticity of demand between it and good Y is -5. Determine how much the consumption of this good will change if:
a. The price of good X decreases by 7 percent.

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

c. Advertising decreases by 4 percent.

d. Income increases by 3 percent.

Answer 1

a). 

$-3×7=21$

A negative price Elasticity means that their is an inverse realationship betwen the price change and quantity demanded and therefore,Price decrease by 7% will increase the quanity demanded by 21%.

Price increase by 8% will decrease quantity demanded by 40%.This is because good x and y are complentary goods.They are complentary goods because they have a negative cross elasticity.

c).

$4×3=12$

A positive price elasticity means that

there is positive realationship betwen the quantity demanded and price charged.Advertising decrease by 12%

d)

$-2×3=6$

Increasing income by 3% decrases the quantity demanded by 6% because the income elasticity is negative.