Suppose the own price elasticity of demand for good X is -3, its income elastici

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 good will change if:
Instructions: Enter your answers as percentages. Include a minus (-) sign for all negative answers.

a. The price of good X decreases by 5 percent.
b. The price of good Y increases by 8 percent

c. Advertising decreases by 4 percent.

d. Income increases by 4 percent

Explanation / Answer

(a) Own price elasticity of -3 means, if price decreases by 1%, demand increases by 3%. So, when price decreases by 5%, demand increases by (3 x 5) = 15%

Change in consumption of X = 15%

(b) Cross price elasticity of -4 means, if price of Y increases 1%, demand of X will decrease 4%. So when price of Y increases 8%, demand for X decreases (4 x 8) = 32%.

Change in consumption of X = - 32%

(c) Advertising elasticy of 2 means, if advertising expenses decreases by 1%, demand for X decreases by 2%. So when advertising decreases 4%, demand for X decreases (4 x 2) = 8%.

Change in consumption of X = - 8%

(d) Income elasticity of 1 means, as income increases by 1%, demand for X increases by 1%. So when income increases by 4%, demand for x increases by 1%.

Change in consumption of X = 1%

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