--%>
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 : Emerge natural monopoly by economics of

    A monopoly might emerge naturally while economies of scale: (w) are small relative to market demand. (x) do not exist. (y) are large relative to market demand for output. (z) and average costs are rising over the market output range.

    Q : Greater inequality in income

    Greater inequality within the income distribution tends to give in greater: (1) social stability and harmony. (2) disincentives against productive efforts. (3) disparities between a Lorenz curve and a 45 degree reference line. (4) maturity of the mark

    		•
  • Q : NOT price discriminate by monopoly Into

    Into equilibrium, a monopoly which does NOT price discriminate will tend to produce: (w) the socially optimal rate of output. (x) a level of output where price exceeds marginal social cost. (y) lower output at lower prices than a competitive market. (

    		•
  • Q : Spending pattern for maximizing utility

    The consumer maximizes utility if spending patterns cause: (1) Level of net utility to increase each time purchases are modified. (2) Marginal utilities of each and every good consumed to be equivalent. (3) Principle of corresponding marginal utilities per dollar to b

    		•
  • Q : Shift in the demand for loanable funds

    Assume that this market is initially within equilibrium along with a supply of funds consequent to S0 and a demand for loanable funds consequent to I1. When the U.S. Department of the Treasury be

    		•
  • Q : Maximize profit by all levels of output

    A monopolist which can’t price discriminate and for that variable cost is zero for all levels of output will maximize profit where is: (w) the price is the maximum any buyer is willing to pay. (x) output exhausts productive capacity. (y) marginal cost = total re

    		•
  • Q : Definitions of Poverty by Researchers

    Some researchers have attempted to define poverty: (1) as the lowest 20% of the income distribution. (2) through estimates of the fundamental needs for families having various characteristics. (3) by estimating the costs of the minimum caloric intake

    		•
  • Q : Define Economics Briefly describe the

    Briefly describe the term economics?

    		•
  • Q : Consumer Surplus-Difference in amounts

    Kiley pays $1.00 for the cold Pepsi on a hot afternoon, however would be willing to pay $5.00. The $4.00 difference in such amounts is her: (i) Consumer surplus. (ii) Income effect. (iii) Economic gain. (iv) Marginal utility. (v) Pleasure coefficient.

    Q : Determine demands for relatively price

    When technological advances within agriculture generate bumper crops of farm products for that demands are relatively price inelastic, in that case the: (w) average income of farmers will decline relative to per capita income for the

    		•