QUESTION TWO

a.Consider the following demand function

Suppose that price of good X is 5, price of good y is 2.5, and income is 10. Find the following;

i.Own price elasticity of demand.[2 Marks]

ii.Cross price elasticity of demand. [2 Marks]

iii.Are X and Y substitute or complements? Explain.[2 Marks]

iv.Income elasticity of demand for good X. [2 Marks]

v.Is X a normal good or inferior good? Explain.[2 Marks]

vi.Is X a luxury good or a necessity good? Explain.[2 Marks]

b.The global economy has been shaken by the outbreak of the covid-19.

i.With the aid of a clearly labelled diagram(s), explain what has happened to the market for face masks.[5 Marks]

ii.Suppose that the price of face masks received a once-off increase, use a clearly labelled diagram to show the decomposition of this price change into the income and substitution effect.[5 Marks]

iii.Are face masks inferior goods or normal goods? Why?[3 Marks]