Question

1. A product has a price elasticity (of demand) equal to -1.50. If price increases by 8 percent, what will be the decrease in quantity demanded?

2. A product has an income elasticity of 0.8. If income rises by 6 percent, what will be the increase in demand?

3. In question 2, is the product most likely a luxury or necessity? Why?

4. The cross price elasticity between two products, L and M, is 0.60 (that is, the change in demand for L with respect to the change in the price of M). If the price of M rises by 10 percent, by how much will the demand for L change?

5. In question 4, are L and M substitutes or complements, and why?

Answer 1

IMSA Date if ed: -1.50 Price 1 by 8% ed : Percentage Percentage change in Quantity change in price demanded -1.50 % od - 1.50 X 8 - % A Od. - 12 = % Ald de quantity demanded falls by. 12°) i) Income elasticity = 0.8 ↑ income by 6% ( Id ). Id = Percentage change in Quantity demanded Percentage chang in Income 0.8 = % Dod 6 4.8 Quantity - %D Od demanded i increases by 4.89% Since income than 1 ie a necessity elasticity in this good. of case demand is less 0.8, it is

a) (ec) Cross price elasticity 0.60 if PM (price of M) ↑ by 10% lc = percentage change in quantity demanded of percentage change in price of good in 0.60 = % AO (L) 10 6 = % Dod (2) there is aa 6% change in Od o. sine goods are the class frice L and M substitutes. evasticity between is positive, they Which means M, Quantity I increases . with increase demanded of in its price of substitute