--%>
Assignment Help - homework help

Income Elasticities of Demand

Question:

(a)  Suppose the income elasticity of demand for pre-recorded music compact disks is +4 and the income elasticity of demand for a cabinet maker's work is +0.4.  Compare the impact on pre-recorded music compact disks and the cabinet maker's work of a recession that reduces consumer incomes by 10 per cent.

(b)  How might you determine whether the pre-recorded music compact discs and MP3 music players are in competition with each other?

(c)   Interpret the following Income Elasticities of Demand (YED) values for the following and state if the good is normal or inferior; YED= +0.5 and YED= -2.5

(d)   Interpret the following Cross-Price Elasticities of Demand (XED) and explain the relationship between these goods. XED= + 0.64 and XED= -2.6

Answer:

a) A positive elasticity means that an increase in income will lead to an increase in the consumption and fall in income will lead to a fall in consumption. If the income of the consumer declines by 10%, then there will be a 40% (4 x 10) fall in the consumption of pre-recorded music CDs and 4%(10 x 0.4) decline in the demand of cabinet maker's work.

b) This can be determined by the cross elastic of the two goods. If the cross elasticity of demand is negative then the goods will be complements to each other and hence they will not be in competition. However, if the cross elasticity of demand is positive then the goods are substitutes and they are in competition.

c) For first good the income elasticity of demand is 0.5 which means that if income increases by 1% then the demand will increase by 0.5%. This makes the food a normal good.

For the second good, the income elasticity of demand is -2.5, which means that an increase in income by 1% will lead to a fall in demand by -2.5%. This means that the good is inferior good.

d) A positive elasticity means that increase in price of one good leads to an increase in demand of the other good. This is the case of substitute goods.

A negative cross elasticity of demand, on the other hand, means that an increase in price of one good leads to a decrease in the demand for the other good. This happens in the case of complements.

   Related Questions in Microeconomics

  • Q : Economic efficiency for pure competition

    Pure competition yields economic efficiency through: (w) punishing profit maximizing behavior. (x) forcing firms to adopt the least costly technologies available. (y) generating high profits as incentives. (z) rewarding entrepreneurs

    		•
  • Q : Problem on greatest consumer surplus

    Which of the following below goods produces the greatest consumer surplus? (1) Free downloading to pirate your favorite songs. (2) Diamonds. (3) Water. (4) College textbooks. (5) Slices of the pizza. Choose the right answer from th

    		•
  • Q : Long-run equilibrium price and output

    Long-run output and equilibrium price combinations describe a purely competitive industry’s: (w) demand curve. (x) long-run supply curve. (y) expansion path. (z) contract curve. I need a good answer on the to

    		•
  • Q : Union Shop Agreements The union shop

    The union shop agreement needs that the worker: (1) Join the labor union prior to beginning to work. (2) Pay union dues even when selecting not to join union. (3) Join the union soon subsequent to being hired. (4) Freely select to join or not join union.

  • Q : Gross Domestic Product of Norway What

    What do you mean by Gross Domestic Product of Norway?

    		•
  • Q : Marginal social costs exceed the

    When governments compelled pharmaceutical producers to manufacture and sell at least Q3 penicillin, in that case the: (1) purely-competitive firms which produced penicillin would experience persistent economic profits. (2) resulting inadequate antibiotic tr

    		•
  • Q : Instance of Adverse Selection Nutcake

    Nutcake Products hires new staffs devoid of revealing that the rising demand for nutcakes and partial staffing make it not possible for staffs to take their guaranteed 2-week vacations. Nut cake’s shortage of candor is most unambiguously an instance of: (1) Symm

    		•
  • Q : Adjust production in profit-maximizing

    Adjust production in all profit-maximizing firms to a level where the marginal: (i) revenue most greatly exceeds average total cost. (ii) revenue curve is at its maximum height. (iii) cost curve is at its lowest point. (iv) cost curve intersects the m

    		•
  • Q : Purely-competitive market demand For

    For the purely-competitive cranberry market, as in below figure there Curve H is: (i) industry’s long-run supply curve. (ii) firm’s demand curve in the short run. (iii) industry’s marginal cost curve. (iv) firm’s long run margi

    		•
  • Q : Product differentiation in market If

    If new soap operas that, although same to the previous ones, all are advertised as original and new, the TV networks are engaging within: (i) bait and switch. (ii) product differentiation. (iii) monopolistic competition. (iv) dynamic game theory. (v)

    		•