Question

Answer each of the following and provide an explanation (a sentence is enough).

(a) What sign would you expect the cross-price elasticity to have if the two goods involved are

• shampoo and conditioner?

• coffee and shoes?

(b) What sign would you expect the income elasticity of demand to have for

• Ramen noodles?

• spa treatments?

Answer 1

1. As we all know that cross price elasticity of demand is between the two goods

Tge two goods are either classified into complements or substitutes

Cross price elasticity of demand is calculated as the ratio of percentage change in quantity demanded of good A to the percentage change in price of good B.

In the first case, as shampoo and conditioner are complementary to each other which means they have negative cross price elasticity of demand

If we talk about coffee and shoes then they are totally unrelated which clearly justify that the cross price elasticity of demand between them is zero

2. Income elasticity of demand tells that how a consumer behaves as his consume income level Rises or decreases.

it is calculated by the ratio of percentage change in quantity demanded to the percentage change in the income

If the good is normal good then income price elasticity of demand will be positive and Inverse of this is for inferior goods

Ramen Noodles as we all know is the inferior type of good which means as the income level of consumer Rises he will consume less

So negative income elasticity of demand.

Spa treatments will come under the positive income elasticity of demand because as the income Rises for consumer, he will demand for this type of services or goods due to his better income condition