Question

4. (12 pts) Please explain the following questions. (a) (3 pts) What is the relationship between slopes of demand curve and price elasticity of demand? (b) (3 pts) How do substitute and complementary goods affect the demand for a good? (c) (3 pts) How do changes in income affect the demand for a good? (d) (3 pts) What is cross-elasticity of demand?

Answer 1

slope of the demand curve determines the ela price elasticity of demand curve. - If the demand curve is vertical, that means there is perfectly inelastic demand [ed=0] -> If the demand curve is steeper that means there is Inelastic[less elastic] demand [oced<] >] The linear demand curve forming 45° angle with both the axes indicates the unitary elastic demand [ed = 1 -) If the demand curve is flatter, that means there is Elastic[more elastie] demand [ized Zoo -) The horitzontal curre represents, the perfectly elastic demand [ed=0c] Scanned with CamScanner

| Substitute goods [x&x]Direct relation Il y price increased, then the Demand for 'y' also increased. If 'X' price decreased, then the Demand for 'y'also decreased. Complimentary goods [A & Bloemen en If 'X' price increased, then the Demand for'y' also decreases. If Y'price decreased, then the edemand for'y, increased Note : Substitutes ate can be used one for cother to complimentary good will be used jontly,

© Income and Demand have direct - relation. - If Income increased, demand for good also increased. o If Icey co the good is Superior (id) If Ocey<the good is normal (109If ey 20 the good is inferior. the respity deman in the © Cross Elasticity of Demand measures the responsiveness of the change in quantity demanded of one commodity due to a change in the price of another commodity. The degree of responsiveness of quantity demanded of one commodity to changes in the price of another commodity is called Cs Cross vielasticity of demande CamScanner