Answer to Question #197581 in Microeconomics for qazi salman

Question

. The values in table below refer to the change in an individual’s demand for two goods A and B when the price of good A rises from 10 to 20. (everything else, including the price of B, remains the same). (a) Draw demand curve for Good A showing these changes and give explanation of change. (b) Explain what kind of shift would be there in demand curve of good B. (c) From the changes in demand and price what you can say that what kind of goods are A and B. . Before After Goods Price Quantity demanded Price Quantity demanded A 10 20 20 15 B 20 40 20 35

Answer 1

Solution:

a.). The cross elasticity of demand measures the responsiveness in the quantity demanded of one good when the price of another good change.

The diagram is as below:

 

 

 

According to the above demand curve, as the price of good A increases from 10 to 20, the demand for good B increases from 20 to 40. This means that good A and B are substitutes. That is an increase in good A price will result in many consumers purchasing good B.

 

b.). The demand curve will shift to the right as the price of Good A increases from 10 to 20 due to an increase in the product demand.

 

c.). Goods A and B are substitute goods. This means that the demand for Good A is an elastic good since a small increase in price will cause a large decrease in demand as consumers start purchasing Good B.