Subpart (a):
Cross price elasticity of demand and income elasticity of demand.
Subpart (a):
Explanation of Solution
In scenario D1, Lorena’s income is $50,000 per year and movies cost $9 each. In scenario D2, Lorena’s income is also $50,000 per year, but the
Cross price
Table -1 shows the demand schedule for the three different goods.
Table -1
Price | Demand 1 | Demand 2 | Demand 3 |
50 | 15 | 10 | 15 |
35 | 25 | 15 | 30 |
20 | 40 | 20 | 50 |
Substitute the respective values in Equation (1), to calculate the cross elasticity when the demand changes from 15 units to 10 units and the price changes from $9 to $11:
Substitute the respective values in Equation (1), to calculate the cross elasticity When the demand changes from 25 units to 15 units and the price changes from $9 to $11.
Price elasticity is 2.5 (Ignore the sign).
Substitute the respective values in Equation (1), to calculate the cross elasticity when the demand changes from 40 units to 20 units and the price changes from $9 to $11:
Price elasticity is 3.33.
It can be concluded that the cross price elasticities are not same in all three cases (for three different prices). As the price decreases, the percentage change in quantity increases.
In all three cases, the cross price elasticities are negative which indicates that golf and movie are complements. If the price of the movie increases, the quantity of movie falls and the consumption of golf games also decline. This implies that, the consumption of a movie and golf games decline as the price of movies rises and vice versa.
Concept introduction:
Cross price elasticity of demand: The cross price elasticity of demand is the change in the quantity demanded for a good due to the price change in another good. The sign of the coefficients of cross price elasticity of demand tells that whether the good is a complement or substitute. If the cross price elasticity of demand is positive, both goods are substitutes. Two goods are complement to each other if the cross price elasticity of demand is negative.
Income elasticity of demand: The income elasticity of demand is the change in the quantity demand for a good due to the change in income. The sign of the coefficients of income elasticity of demand tells whether the good is normal or inferior. If the income elasticity of demand is positive, the good is considered to be a normal good. The good is an inferior good if the income elasticity of demand is negative.
Subpart (b):
Cross price elasticity of demand and income elasticity of demand.
Subpart (b):
Explanation of Solution
Income elasticity of demand can be calculated by using the midpoint formula:
Substitute the respective values in Equation (2), to calculate the cross elasticity when the quantity changes from 10 units to 15 units and the income changes from $50,000 to $70,000.
Substitute the respective values in Equation (2), to calculate the cross elasticity when the quantity changes from 15 units to 30 units and the income changes from $50,000 to $70,000.
Substitute the respective values in Equation (2), to calculate the cross elasticity when the quantity changes from 20 units to 50 units and the income changes from $50,000 to $70,000, required income elasticity of demand is given by;
In all three cases, the income elasticity of demand is not the same. As the price declines, the change in the quantity demanded becomes more sensitive to the change in income. The demand for the golf games is more sensitive to the income at lower prices.
Here, signs of the coefficients of income elasticity of demand are positive which indicates that, as the income increases, the demand for golf games increases and as income decreases, the demand for the golf game falls. That is the income and the demand for golf is positively related. Thus, the golf game is a considered to be a normal good.
If the demand for a good increases with the decrease in income, the sign of the coefficients of income elasticity of demand is negative and thus the good is an inferior good.
In short, if the sign of the coefficient of income elasticity of demand is positive, the good is a normal good and if it is negative, the good is an inferior good.
The golf game is a normal good and not an inferior good.
Concept introduction:
Cross price elasticity of demand: The cross price elasticity of demand is the change in the quantity demanded for a good due to the price change in another good. The sign of the coefficients of cross price elasticity of demand tells that whether the good is a complement or substitute. If the cross price elasticity of demand is positive, both goods are substitutes. Two goods are complement to each other if the cross price elasticity of demand is negative.
Income elasticity of demand: The income elasticity of demand is the change in the quantity demand for a good due to the change in income. The sign of the coefficients of income elasticity of demand tells whether the good is normal or inferior. If the income elasticity of demand is positive, the good is considered to be a normal good. The good is an inferior good if the income elasticity of demand is negative.
Want to see more full solutions like this?
Chapter 6 Solutions
MICROECONOMICS (LL) W/CONNECT ACCESS
- Recent research confirms that the demand for cigarettes is not only inelastic, but it also indicates that smokers with incomes in the lower half of all incomes respond to a given price increase by reducing their purchases by amounts that are more than four times as large as the purchase reductions made by smokers in the upper half of all incomes. How can the income and substitution effects of a price change help explain this finding?arrow_forwardThe following table shows two demand schedules for a given style of men’s shoe—that is, how many pairs per month will be demanded at various prices at a men’s clothing store in Seattle called Stromnord. Suppose that Stromnord has exactly 65 pairs of this style of shoe in inventory at the start of the month of July and will not receive any more pairs of this style until at least August 1. a. If demand is D1, what is the lowest price that Stromnord can charge so that it will not run out of this model of shoe in the month of July? What if demand is D2? b. If the price of shoes is set at $75 for both July and August and demand will be D2 in July and D1 in August, how many pairs of shoes should Stromnord order if it wants to end the month of August with exactly zero pairs of shoes in its inventory? What if the price is set at $55 for both months?arrow_forwardSalima is a devoted coca cola consumer, whereas Antonia can drink either coca cola or Pepsi products. Salima's demand for coca cola will be ______, while antonia's demand will be relatively more _______.arrow_forward
- Julia has usual preferences over X and Y, and, at current prices and income, she spends 1/2 of her income on X. Her demands for both goods respond to changes in her income, but at current prices and income the income elasticity of her demand for Y is equal to exactly 1/3 times the value of her income elasticity of demand for X. And do you know what? If the price of Y were to go up by 1 percent, the quantity of X she demands would remain unchanged. a. If the price of X were to fall, would her demand for X increase, decrease or remain unchanged? More precisely, what is the own-price elasticity of her demand for X? b. If her income were to rise, would her demand for X rise, fall or remain unchanged? More precisely, what is the income elasticity of her demand for X?arrow_forwardThe table below shows two demand schedules for a given style of men’s shoe—that is, how many pairs per month will be demanded at various prices at a men’s clothing store in Seattle called Stromnord. Price D1 Quantity Demanded D2 Quantity Demanded $85 53 13 80 60 15 75 68 18 70 77 22 65 87 27 Suppose that Stromnord has exactly 70 pairs of this style of shoe in inventory at the start of the month of July and will not receive any more pairs of this style until at least August 1. Instructions: Enter your answers as whole numbers.a. If demand is D1, what is the lowest price that Stromnord can charge so that it will not run out of this model of shoe in the month of July? What if demand is D2? b. If the price of shoes is set at $85 for both July and August and demand will be D2 in July and D1 in August, how many pairs of shoes should Stromnord order if it wants to end the month of August with exactly zero pairs of shoes in its inventory? What if the…arrow_forwardThe table below shows two demand schedules for a given style of men's shoe- that is, how many pairs per month will be demanded at various prices at a men's clothing store in Seattle called Stromnord. price D1 Quantity Demanded D2 Quantity Demanded $ 75 53 13 70 60 15 65 68 18 60 77 22 55 87 27 Suppose that Stromnord has exactly 65 pairs of this style of shoe in inventory at the satrt of the month of July and will not receive any more pairs of this style until at least August 1. Instructions: Enter your answers as whole numbers 1). If demand is D1 what is the lowest price that Stromnord can charge so that it will not run out of this model of shoe in the month of July? What if demand is D2? 2) If the price of shoes is set at $ 75 for both July and August and demand will be D2 in July and D1 in August, how many pairs of shoes should Stormnord order if it wants to end the month of August with exactly zero pairs of shoes in its inventory? What if the price is set at $ 55…arrow_forward
- Q63 Cresco Labs is the largest cannabis producer in the U.S.A. Let's assume the Cresco Labs finds that total revenue decreased when price of marijuana was lowered from $5 to $4 per ounce. It was also found that total revenue decreased when price was raised from $5 to $6 per ounce. Thus, we can conclude that: Multiple Choice $5 is not the equilibrium price of marijuana. the demand for marijuana is inelastic above $5 and elastic below $5. the demand for marijuana is elastic both above and below $5. the demand for marijuana is elastic above $5 and inelastic below $5. it is clear that diminishing marginal utility for the consumption of marijuana has set in.arrow_forward1.5 Your firm, Content Friend, is similar to Happy Labourer, a Ghanaian firm that designs and manufactures artifacts and souvenirs. Your research analyst has estimated the demand function for your kente souvenirs is Qd = 33 - 4P If you set the price of a plush kente souvenir at $5, how many will consumers buy? If you increase the price of a plush kente souvenir by $1, how will this change the quantity that your customers buy?arrow_forwardThe horizontally oriented definition of DEMAND states that "demand is the quantitites of a good that buyers are willing and able to buy at various prices in a given time interval." Which of the following statements are TRUE? If I really like a good, it does not matter how much I am able to afford to spend on it. The demand for a good is a specific amount. Demand is a behavioral relationship expressing what quantities buyers would want and be able to buy at various prices. If I can't afford to buy a product at today's available prices, I do not have a demand. The demand is all the possible price quantity combinations Demand depends on the availability of supply. Demand is a relationship between price as a variable and quantity demanded as a variable. Demand is a flow and requires a time interval be be fully understood.arrow_forward
- Consider some determinants of the price elasticity of demand: • The availability of close substitutes • Whether the good is a necessity or a luxury • How broadly you define the market • The time horizon being considered A good with many close substitutes is likely to have relativelyelastic demand, since consumers can easily choose to purchase one of the close substitutes if the price of the good rises. A good’s price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the most elastic demand? Sports car Chemotherapy for cancer patients The price elasticity of demand for a good also depends on how you define the good. Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between.…arrow_forwardThe following graph shows two known points (X and Y) on a demand curve for oranges. According to the midpoints formula, the price elasticity of demand for oranges between point X and point Y is approximately ______ , which suggests that the demand for oranges is ________ between points X and Y.arrow_forward
- Economics: Private and Public Choice (MindTap Cou...EconomicsISBN:9781305506725Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage LearningMicroeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506893Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
- Exploring EconomicsEconomicsISBN:9781544336329Author:Robert L. SextonPublisher:SAGE Publications, Inc