2 What does the sign (positive versus negative) of the income elasticity of demand tell us about a good?

The change in the quantity demanded is the opposite of what we’ve just calculated (again as percentages of the average quantity and average price): the quantity of smoothies demanded decreases by 20 per cent (-20%).
The change in the price of a salad, a complement of smoothie, is the same as the percentage change in the price of a coffee that we’ve just calculated: the price of a salad rises by 50 per cent (+50%). So the cross elasticity of demand for smoothies with respect to the price of a salad is:

Because smoothies and salads are complements, when the price of a salad rises, the demand for smoothies decreases. The demand curve for smoothies shifts leftward from D0 to D2. Because a rise in the price of a salad brings an decrease in the demand for smoothies, the cross elasticity of demand for smoothies with respect to the price of a salad is negative. The price and quantity change in opposite directions.

Transcribed Image Text:

-20% +50% -0.4