Question
(a) Consider the following information for a product A and a related product B in consumption: Quantity of A traded Price of A Income of
(a) Consider the following information for a product A and a related product B in consumption:
Quantity of A traded | Price of A | Income of Consumers | Price of B |
1,200 | $1.00 | $10,000 | $1.00 |
1,800 | $0.90 | $8,000 | $0.80 |
(i) Determine the price elasticity of demand for product A, the income elasticity of demand for product A and the cross-price elasticity of demand between product A and product B using the mid-point formula. Based on the elasticities, explain how you classify product A in terms of its price and income elasticities of demand and also the relationship between product A and product B.
(ii) Given that the price of product A decreases by 5%, consumers' income decreases by 3% and the price of product B increases by 4%, compute the effect on the revenue from product A, assuming each change occurs separately.
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