Suppose the own price elasticity of demand for good X is -5, its income elasticity is 1, its advertising elasticity is 3, and the cross-price elasticity of demand between it and good Y is 4. Determine how much the consumption of this good will change if.
Instructions: Enter your responses as percentages. Include a minus () sign for all negative answers.
a. The price of good X decreases by 5 percent.
b. The price of good Yincreases by 8 percent.
c. Advertising decreases by 2 percent.
d. Income increases by 4 percent
a) Own price elasticity of demand is given by ed = % change in Qd of X / % change in own price
-5 = % change in Qd / -5%
% change in Qd = -25%
Hence quantity of good X changes by -25 percent (there is a minus sign)
b) Cross price elasticity = % change in Qd of X / % change in price of Y
4 = % change in Qd / 8%
% change in Qd = 32%
Hence quantity of good X changes by 32 percent.
c) Here quantity of good X changes by -6 percent (there is a minus sign)
d) Here quantity of good X changes by 4 percent
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