Answer to Question #130559 in Microeconomics for yasir

Question

Differentiate between cross price elasticity and income elasticity of demand. also provide interpretation of signs

Answer 1

Income elasticity of demand is the relative change in demand of one commodity or service because of a change in the consumer's income.

An increase in consumer's income will lead to a rise in demand and vice versa

Cross price elasticity of demand is the relative change in the demand of one good or service caused by a change in price of another good or service. If the price of the complementay good falls, the quantity demanded of the other good will increase and vice versa. For substitute goods, as the price of one good goes up, the demand for the substitute good rises also.