Question

Suppose the own-price elasticity of demand for good X is −3, its income elasticity is 1, its advertising elasticity is 2, and the cross-price elasticity of demand between it and good Y is −4. Determine how much the consumption of this goodwill change if the price of good X decreases by 5 percent.

Answer 1

Consumption of good will increase by 15%

Step-by-step explanation:

Price Elasticity of Demand : is demand responsiveness to price change.

Ped = Percentage change in demand/ percentage change in price

Ped = %ΔQ / %ΔP

%ΔP = -5 ; Pe = -3 [Given]

As per formula :

-3 = %ΔQ / -5

%ΔQ = (-3)X (-5) = +15%

Percentage change (increase) in Quantity = 15%