Question

1. The price of elasticity of demand for a commodity is -2. What would be the change in quantity demanded, if price increases by 30 %?

2. A decrease in cost of producing X per unit reduces the price of X per unit. As a result, the demand for good Y increases. Are good X and Y complements, substitutes, both, or neither?

3. Suppose a recent research finds that an increase in consumption of a good reduces the risk of diabetes. Would this report increase or decrease demand for the good?

Answer 1

Answer 1. Percentage change in quantity demanded= Price elasticity of demand * Percentage change in price

= -2*30%

=-60%

So, Quantity demanded decreases by 60%.

Answer 2. When price of X falls, demand for X rises due to law of demand. If the demand for Y also rises, it means both goods are complementary goods. As people like to consume them together.

Answer 3. According to the research increase in consumption of a good reduces the risk of diabetes, it means people will like to consume more of that good. So the demand for the good will increase.