Answer to Question #230779 in Microeconomics for Alex

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

• a) FALSE.

If the cross-price elasticity is positive, it means that two goods are substitutes. For example, coffee and tea are substitutes. An increase in the price of coffee will cause an increase in demand for tea. The price of coffee and quantity demanded of tea are positively related and hence a positive cross-price elasticity.

• b) FALSE.

To determine whether a product is luxury or not, we use the income elasticity of demand and not the own-price elasticity of demand. When the income elasticity of demand is greater than one, then the product is a luxury. On the other hand, when the own-price elasticity of demand is greater than one, then the product is said to be price elastic.

• c) TRUE.

An increase in demand results in a surge in demand. A rise in demand is usually exhibited by the righted (upward) change in the demand curve.

• d) TRUE.

A flatter supply curve implies that the supply is elastic. When the supply is elastic, the price elasticity of supply is higher than one.