Answer to Question #172155 in Microeconomics for Frank

Question

Assume that consumers always buy 20 units of good X each month regardless of its price.

a. Draw the demand curve for good X. Comment on the price elasticity of demand for good X and state its numerical value.

b. Give one example of a good which might have such a demand curve and explain. Comment on the availability of substitutes for this good. Comment whether this good is a luxury or a necessity good.

c. Referring to your answer in part (b), comment on the sign(s) and value(s) the following two elasticities might take and explain your reasoning:

• Cross price elasticity of demand between goods X and Y; where good X is the good in question and good Y is any other good. For this part consider all possible relationships between the goods.

• Income elasticity of good X.

Answer 1

Price                                                                                                                                    

0 quantity

it is a perfectly inelastic demand curve with a numerical value of zero.

b) A lifesaving drug. Substitutes for goods with perfectly inelastic demand curve are not readily available. The good is a necessity. 

c)if the goods are perfectly substitutable, the elasticity and value of elasticity will be zero

If the goods are somehow substitutable the value will be a positive number with inelastic elasticity

If the goods are very substitutable it will be a positive sign value with elastic demand

If the goods are perfect substitutes there will be perfectly elastic demand with a positive value

Even if the income changes, the quantity demanded remains the same. Thus, the income elasticity is equals to 0.