Income Elasticity and Cross Price Elasticity

1. (10 points) Table 1 presents representative cross-price elasticities for four categories of goods: Transportation,

recreation, food, and clothing.In Table 1 below, the elasticity is interpreted as the percentage change in the

quantity demanded of Good A in response to a 1% change in the price of Good B.

Table 1

Goods A and B

Cross-Price Elasticity

Transportation (A) and Recreation (B)

-0.05

Food (A) and Recreation (B)

0.15

Food (A) and Clothing (B)

-0.18

a. Interpret the elasticity information in Table 1 to identify whether the following two categories of goods are

complements or substitutes:

1) Transportation and Recreation

2) Food and Recreation

3) Food and Clothing

b. You have just opened a new grocery store.Every item you carry is generic (generic bread, generic beer, generic

chicken, etc.).You recently read that the price of recreation is expected to increase by 15 percent.How will this

affect your store's sales of generic food products?Compute the percentage change in quantity demanded of

food.

c. A relative has just opened a new clothing store where every item carried is a generic knock-off of designer

brands.If an increase in the demand for food is expected to cause food prices to rise by 10 percent, how will this

affect your relative's store's sales of generic clothing?Compute the percentage change in quantity demanded

of clothing.