Answer to Question #244526 in Microeconomics for james

Question

1. Suppose the price elasticity of demand for Geisha soap is 4. What will be the effect on the quantity demanded for Geisha Soap if price rises by 8%? 2. Suppose the income elasticity of demand for jewelry is 3 and the income elasticity of demand for medical services is 0.3. What does this mean? Compare the impact on jewelry and medical services of a recession that reduces consumers’ incomes by 6% 3. Assume the cross elasticity of demand for chicken with respect to the price of fish is 2 and -2 with respect to the price of potatoes chips . What does this mean? What will be the effect on the quantity demanded for fish and potatoes chips if the price of chicken rises by 7%?

Answer 1

1. Elasticity of demand =%percentage change in quantity demanded /%percentage change in price

Elasticity of demand=4

Percentage change in price = 8

4=percentage change in quantity demanded/8

percentage change in quantity demanded=4*8=32

So demand is decreased by 32%.

2. Income Elasticity of Demand = % Change in demand/ % Change in income

If income is reduced by 6%, then

Income Elasticity of demand of jewelry = % Change in demand of jewelry / % Change in income

3 = % Change in demand jewelry of /6

% Change in demand of jewelry = 18%

Income Elasticity of demand of medical services = % Change in demand of medical services/ % Change in income

0.3 = % Change in demand of medical services/6

% Change in demand of medical services = 1.8%

If income of family is reduced by 6%, then demand for medical services be adversly affected and reduced by only 1.8%. This implies that medical services is a normal necessities.

Then demand for jewelry would be adversly affected and reduced by 18%. This implies that jewelry is a luxury good.

3. In cross price elasticity we measure the effect of change in orice of one good on the quantity demanded of other.

effect of change in price of fish on demand of chicken (cross-price elasticity of demand)=2

effect of change in price of potatoes chips on demand of chicken (cross-price elasticity of demand)=-2

CPED=%Change in quantity demanded of chicken/%change in price of fish

No data available to calculate the change in demand for fish and potato chips (cross-price elasticity of fish demand versus chicken price)