The Own price elasticity of demand for good X is -2, its income elasticity is 3, its advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is -6. Determine how much the consumption of this good will change if : the price of good X increases by 5 percent
price of good Y increases by 10 percent
advertising decreases by 2 percent
Income falls by 3 percent.
Price elastic
To determine how the consumption of good X will change with the given changes, we can use the elasticities provided.
1. Price elasticity of demand: The own price elasticity of demand measures how the quantity demanded of a good changes in response to a change in its price. In this case, the own price elasticity of demand for good X is -2.
To calculate the percentage change in quantity demanded, we multiply the percentage change in price by the own price elasticity:
Percentage Change in Quantity Demanded = Own Price Elasticity × Percentage Change in Price
For the first scenario, the price of good X increases by 5 percent. Therefore, the percentage change in price is 5 percent.
Percentage Change in Quantity Demanded = -2 × 5 percent
= -10 percent
The consumption of good X will decrease by 10 percent if its price increases by 5 percent.
2. Cross-price elasticity of demand: The cross-price elasticity of demand measures how the quantity demanded of one good changes in response to a change in the price of another good. In this case, the cross-price elasticity of demand between good X and good Y is -6.
Using the same formula as before, we can calculate the percentage change in quantity demanded of good X when the price of good Y increases by 10 percent:
Percentage Change in Quantity Demanded = Cross-price Elasticity × Percentage Change in Price
Percentage Change in Quantity Demanded = -6 × 10 percent
= -60 percent
The consumption of good X will decrease by 60 percent if the price of good Y increases by 10 percent.
3. Advertising elasticity of demand: The advertising elasticity of demand measures how the quantity demanded of a good changes in response to a change in advertising expenditure. In this case, the advertising elasticity of demand for good X is 4.
For the third scenario, when advertising decreases by 2 percent, we can calculate the percentage change in quantity demanded as follows:
Percentage Change in Quantity Demanded = Advertising Elasticity × Percentage Change in Advertising
Percentage Change in Quantity Demanded = 4 × -2 percent
= -8 percent
The consumption of good X will decrease by 8 percent if advertising decreases by 2 percent.
4. Income elasticity of demand: The income elasticity of demand measures how the quantity demanded of a good changes in response to a change in income. In this case, the income elasticity of demand for good X is 3.
For the fourth scenario, when income falls by 3 percent, we can calculate the percentage change in quantity demanded of good X as follows:
Percentage Change in Quantity Demanded = Income Elasticity × Percentage Change in Income
Percentage Change in Quantity Demanded = 3 × -3 percent
= -9 percent
The consumption of good X will decrease by 9 percent if income falls by 3 percent.
By applying the respective elasticities to the given changes, we can determine how the consumption of good X will be affected in each scenario.