Question

Suppose that you just got a raise at work and are trying to figure out how you are going to spend the additional money. Given the table below, answer the following:

% Change in Income	% Change in Quantity Demanded of Good A
-2%	-3%
0%	-2%
4%	-1%
6%	0%
8%	4%
10%	6%

a. Calculate the elasticity of income (EY) for Good A if your raise was 8%

b. Is Good A an inferior or normal good.

c. At what point does Good A become an inferior good?

  

% Change in Price of Good A	% Change in Quantity Demanded of Good A	% Change in Quantity Demanded of Good B
-15	20	-5
-10	6	-3
-5	5	2

Suppose that the price of Good A decreases by 10%

d. What is the price elasticity of demand for Good A?

e. Is Good A price elastic or price inelastic?

f. What is the cross-price elasticity between Good A and Good B?

g. Is Good B a complement or a substitute?

Answer 1

a) EY = % change in quantity demanded of good A / % change in income

= 4% / 8%

= 0.5

b) Since EY is positive, so, good A is a normal good.

c) Good A is an inferior good when income elasticity is negative.

d) PED for good A = % change in quantity demanded of good A / % change in price of good A

= 6% / -10%

= -0.6   

The absolute value of PED is 0.6

e) Since, PED is less than 1, so, good A is price inelastic.

f) CPED between A & B = % change in quantity demanded of good B / % Change in price of good A

= -3% / -10%

= -0.3

f) Since CPED is negative, it means good B is a complement.