Problem 2 (8 points) Letters a-f correspond to different values of a demand or s
ID: 1164854 • Letter: P
Question
Problem 2 (8 points) Letters a-f correspond to different values of a demand or supply elasticity. Match one and only one of these letters to each statement that follows. Each letter may be used for more than one statement or for no statement at all. a. The cross price elasticity of demand is 0.25 b. The cross price elasticity of demand is -0.25 c. The income elasticity of demand is 1.05 d. The income elasticity of demand is 0.05 e. The income elasticity of demand is-0.05 f. The own price elasticity of demand is -1.5 g. The own price elasticity of demand is -1 h. The own price elasticity of supply is 1.25 i. The cross price elasticity of supply is 0.25 j. The cross price elasticity of supply is-0.20 Statements Letter b Statement Example: Therelated good isacomplementaryproducttothe good in question. The good in question is classified as a normal luxury A small increase in the price of the good will decrease revenue to the seller. | 1 if the price of this good increases by 2% quantity demanded will fall by 2% . The good in question is an inferior good Demand for this good is elastic The related good is a joint product to the good in question The good in question is classified as a normal necessity Revenue to the seller of this good is maximizedExplanation / Answer
Statement 1
The good in question is classified as a normal luxury.
In case of normal luxury, the income elasticity of demand is greater than 1.
The correct answer is the letter (c).
Statement 2
A small increase in the price of the good will decrease the revenue to the seller.
This happens when the demand for the good is elastic.
The correct answer is the letter (f).
Statement 3
If the price of this good increases by 2% quantity demanded will fall by 2%.
This can happen when the own price elasticity of demand is -1.
The correct answer is the option (g).
Statement 4
The good in question is an inferior good.
The income elasticity of demand for an inferior is negative.
The correct answer is the letter (e).
Statement 5
Demand for this good is elastic.
The demand for a good is said to be elastic if the value of own price elasticity for such good is greater than 1.
The correct answer is the letter (f).
Statement 6
The related good is a joint product to the good in question.
If related good is a joint product to the given good then cross price elasticity of supply between them would be positive.
The correct answer is the letter (i).
Statement 7
The good in question is classified as a normal necessity.
The income elasticity of demand for a normal necessity is positive but less than 1.
The correct answer is the letter (d).
Statement 8
Revenue to the seller of this good is maximized.
Revenue can be maximized when the own price elasticity of demand is equal to 1.
The correct answer is the letter (g).
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