In Music Ville, the price elasticity of demand for CD players is 1.3, the income

Question

In Music Ville, the price elasticity of demand for CD players is 1.3, the income elasticity of demand for CD players is 0 4, and the cross elasticity of demand for CD players with respect to MP3s is 0.1. If incomes in Music Ville increase by 15 percent with no change in the price of a CD player, the number of CD players by percent. In Music Ville, a CD player is good. In Music Ville, CD players and MP3s are. A. an inferior; substitutes B. a normal; complements C. an inferior; complements D. a normal; substitutes

Explanation / Answer

Given income elasticity of demand = 0.4

Income increased by 15%

Now , income elasticity = %cchange in quantity / %change in income

I.e. % change in income = 0.4 × 0.15 = 40 / 15 = 2.66

THE NUMBER OF CD PLAYERS INCREASE BY 2.67%.

A CD PLAYER IS A NORMAL GOOD.

AND CDs AND MP3 ARE SUBSTITUTES because cross price elasticity is positive. OPTION D

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