You know that the cross-price elasticity of demand for doughnuts and coffee is equal to -1.5. From this elasticity value you conclude that doughnuts and coffee are _____________________. Suppose that the price of coffee increases by 10%. Given the cross-price elasticity of demand for these two goods you estimate that the percentage change in the quantity demanded of doughnuts will be _____________________________________ (make sure you identify whether the % change is positive or negative in your answer).
You know that the income elasticity of demand for doughnuts is equal to 1.2 You read in the newspaper that the economy has entered a recession and you are interested in how this recession will affect your doughnut business. Holding everything else constant, what do you anticipate will happen to the demand for doughnuts? Are doughnuts a normal good given this information?