Answer to Question #230670 in Microeconomics for sarim khan

Question

State whether the Statement is TRUE or FALSE. Also write the reason (Without reason your answer will not accepted)

a)    If value of cross price elasticity is positive then it means there are less close substitutes are available of that product.

b)    In case of luxury products, the own price elasticity of demand is greater than one.

c)    If salaries of journalist go up then demand curve of newspaper will shift upward.

d)    When price elasticity of supply is greater than one it means supply curve is flatter.

Answer 1

Solution:

a.). False.

If the cross-price elasticity is positive, it means that the two products are substitutes and that there are more goods that can be substituted. That is, when there is an increase in the price of a good, the quantity demanded of its substitute will increase as more consumers substitute the good with its substitute that is relatively cheaper. The two goods are thus positively related since they have a positive cross-price elasticity.

 

b.). False.

The income elasticity of demand is used to measure the responsiveness of the change in the quantity demanded of a product when the income of consumers changes. In the case of luxury products, the income elasticity of demand is greater than one. This is because as the consumer's income increases, they demand more quantity of these luxury products.

 

c.). False.

 If salaries of journalists go up, the newspaper production costs will go up, hence newspaper publishers will decrease the quantity supplied at any given price due to increased production costs. The demand curve of newspapers will shift to the left resulting in a rise in equilibrium price and a decrease in the equilibrium quantity since quantity demanded will fall due to an increase in price.

 

d.). True.

When the price elasticity of supply is greater than one, the product has a flatter, upward-sloping curve, since supply is relatively elastic. That is, where the quantity supplied changes by a bigger percentage than the price change.