Question

Asked Oct 1, 2019

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 good X will change if:

- The price of good X decreases by 5%
- The price of good Y increases by 8%
- Advertising decreases by 4%
- Income increases by 4%

Step 1

Part 1) When price of good X decreases by 5% , consumption of good X will **increase by** **15%**

Step 2

Part 2)

When price of Y increases by 8%, consumption for X decreases by 32% as indicated by minus sign.

When price of Y increases by 8%, consumption of y decreases anyway but consumption of X also decreases as per our calculations. This suggests that X and Y are complement goods as their prices move together.

**Change in consumption of X = -32%**

Step 3

Part 3)

Let Ax represent the units of advertising expenses.

Consumption of X decreases by 8% when ad...

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