Question
1a. SupposetheownpriceelasticityofdemandforgoodX is-5,itsincomeelasticity is-1,itsadvertising elasticity is4,andthecross-price elasticity ofdemand between good X and good Y is 3.Determine the percent change in the consumptionof good X if:
1a. SupposetheownpriceelasticityofdemandforgoodX is-5,itsincomeelasticity is-1,itsadvertising elasticity is4,andthecross-price elasticity ofdemand between good X and goodYis 3.Determine the percent change in the consumptionof good X if:
(a) ThepriceofgoodXdecreasesby6percent. -5 x (6%)=30% (increase)
(b) ThepriceofgoodYincreasesby7percent. 3 x (7%)= -21% (decrease)
(c) Advertisingdecreasesby2 percent. 4 x (-2%)= -8% (decrease)
(d) Incomeincreases by3percent. -1 x (3%)= -3% (decrease)
Show your calculations in each case.
(Will you please check my work to make sure i did 1a correctly?)
1b. The objective of advertising is sometimes to allow a firm to sell a premium product or to charge a premium price for its product. In this case does advertising increase or decrease the price elasticity of demand? Please give an explanation.
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