3. (20 points) You have the following information for goods X and Y: Goods Price

Question

3. (20 points) You have the following information for goods X and Y: Goods Price elasticity Cross-price elasticity Income elasticity -0.5 0.2 0.8 0.2 Fill out the spaces in the following statements: Consider good X. An increase in the price of good X will revenues for suppliers. total Consider good Y. An increase in the price of good Y will revenues for suppliers total Based on the cross-price elasticity, we can say that goods X and Y are - Based on the income elasticity, we can say that good Y is -A 10% increase in income will the sales of good X % A 10% increase in the price of good X will the sales of Good X %and the sales of good Y

Explanation / Answer

1) Increases total revenue

Ed = 0.5 < 1 i.e. inelastic

when demand is inelastic, increase in price causes increase in total revenue.

2) Decrease total revenue

Ed = 1.8 > 1 i.e. Elastic

when demand is elastic, increase in price causes decrease in total revenue.

3) Substitute goods

This is because cross price Ed is positive.

4) Y is an inferior good.

Negative income Ed means increase in income decreases demand of good Y.

5) Income Ed = % change in Qd of X / % change in Income

0.8 = % change in Qd of X / 10

% change in Qd of X = 8

So, Sales of good X increases by 8%.

6) Ed = % change in quantity demanded of X / % change in price

- 0.5 = % change in quantity demanded of X / 10

% change in quantity demanded of X = - 5

So, decrease by 5%

Cross price Ed = % change in quantity demanded of Y / % change in price of good X

0.2 = % change in quantity demanded of Y / 10

% change in quantity demanded of Y = 2

So, sales of good Y increases by 2%.

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