Question

1. Suppose the own price elasticity of demand for good X is -3, it's 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 if this good will change if:

a) The price of good X decreased by 5%
b) The price of good Y increased by 8%
c) Advertising decreased by 4%
d) Income Increased by 4%
2. Suppose the cross price elasticity of demand between X and Y is 4, how much would the price of good Y have to change in order to increase the consumption of good X by 20%?

Answer 1

If the elasticity is 1.4, advise lowering the price; if it is 0.6, raise the price; if it is 1, maintain the price. Gasoline price elasticity of supply affects UPS and FedEx. The income elasticity of bread consumption is -0.307, making bread an inferior good.

Step-by-step explanation:

If the elasticity of demand for the company's product is 1.4, the company should lower the price. This is because the decrease in price will be offset by the increase in the amount of the product sold, resulting in higher total revenue. If the elasticity were 0.6, the company should raise the price. Increasing the price will offset the decrease in the number of units sold, leading to higher total revenue. If the elasticity is 1, the total revenue is already maximized, and the company should maintain its current price level.

The gasoline price elasticity of supply refers to the percentage change in quantity supplied as a result of a given percentage change in the price of gasoline. For a company like UPS or FedEx, this means that if the price of gasoline increases, the company's supply of transportation services will become less elastic. This could lead to higher costs for the company and possibly a decrease in their ability to meet customer demand.

To calculate the income elasticity of bread consumption, we use the formula: (Change in Quantity / Average Quantity) / (Change in Income / Average Income). In this case, the change in quantity consumed is -8 (30 - 22), the average quantity is 26 (30 + 22 / 2), the change in income is 13000 (38000 - 25000), and the average income is 31500 (25000 + 38000 / 2). Plugging these values into the formula, we get (-8 / 26) / (13000 / 31500) = -0.307. Since the income elasticity is negative, bread is an inferior good.

Answer 2

A) X Demand fall 15% ; B) X Demand fall 32% ; C) X Demand fall 8% ; D) X Demand rise 4% . 2] Price (Y) rise 5%

Step-by-step explanation:

Elasticity is the responsive change in demand of a good, due to any factor affecting it.

Elasticity = % change in demand / % change in factor affecting demand So, % change in demand = % change in factor x Elasticity

Given : Price Elasticity = -3 , Income Elasticity = 1 , Advertising Elasticity = 2 , Cross Price Elasticity = -4

A) Price of good decrease by 5% : So, Demand would change by 5 x price elasticity, 5 x -3 i.e - 15% (demand fall)

B) Price of good Y increase by 8% : So, X's Demand would change by 8 x -4 i.e - 32 % (demand fall)

C) Advertising decreased by 4% : So, X's demand would change by -4 x 2 i.e - 8% (demand fall)

D) Income increase by 4% : So, X's demand would change increase by 4 x 1 i.e 4% (demand rise)

2. Cross Price Elasticity = 4 ; Desired change in quantity = 20% increase

Elasticity ( 4 ) = desired % change in demand (20%) / % change in Y price

% change in Y price = 20 / 4 = 5 % (price rise)