--%>
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 : Marginal resource cost of labor For a

    For a gain maximizing competitive firm operating in the competitive labor market, the: (1) Marginal resource cost of the labor is similar to the wage rate. (2) Supply of the labor is perfectly inelastic. (3) Production quota is precisely proportional to the labor hire

    		•
  • Q : Biography-Thorstein Veblen The thought

    The thought that the desire of people to purchase goods is culturally recognized as opposed to the price determined is the vision of: (i) Irving Fisher. (ii) Karl Marx. (iii) Thorstein Veblen. (iv) Ludwig von Mises. (v) Antoine Augustin.

    Q : Price taker market for

    The “kinked-demand-curve” model is an effort to model the behavior of firms within: (1) a cartel. (2) a monopoly. (3) price leadership. (4) an oligopoly. (5) a price taker market. Hello guys I want your

    		•
  • Q : Transaction costs by pure economic rents

    When transaction costs exist, in that case taxes on what appear to be pure economic rents to: (1) pose especially severe problems for economic efficiency. (2) may be inefficient since taxes reduce incentives to put resources to their

    		•
  • Q : Welfare from Poor to Rich “ Welfare by

    “Welfare by the poor to the rich” is best illustrated when: (1) an l8 year old dishwasher pays Social Security taxes to give payments to a 67 year old retired vice president of General Motors. (2) federal highway funds are diverted to a ma

    		•
  • Q : Higher interest rate in funds A higher

    A higher interest rate is probably to be a consequence of: (1) lower expected profitability to investors. (2) new tax breaks onto interest income. (3) weakening preferences for current income over future income. (4) increased preferences for recent co

    		•
  • Q : Optimization and Heuristics Can someone

    Can someone help me in finding out the right answer from the given options. No one can execute all the mental gymnastics essential to perfectly process information and hence all their decisions are mathematically optimal, therefore most of the people rely heavily on m

    		•
  • Q : Raising or lowering the price in demand

    The point on this illustrated demand curve in below at that either raising or lowering the price causes total revenue of Monsieur Cournot to decline is: (i) point a. (ii) point b. (iii) point c (iv) point d. (v) point e.

  • Q : Surveyors problem Surveyors sometimes

    Surveyors sometimes cannot arrange a probabilistic sample and instead rely on a variety of non-probabilistic techniques, each which poses potential problems. Surveyors could: target a quota of a certain type of res

    		•
  • Q : Market economies of individual

    In the market economies, resources are finally owned by the: (i) Corporations which dominate the economic activity. (ii) Proprietorships and partnerships. (iii) Business firms collectively. (iv) Individual house-holds. (v) Government acting as the social trustee.

    		•