--%>
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 : AFC curve What does AFC curve appear

    What does AFC curve appear like? Why does it appear so?

    		•
  • Q : Problem on Monopolistic Competition

    When fifty fast-food restaurants belonging to fourteen various chains are strung along an eight mile stretch of highway, it is an illustration of: (1) a primitive cartel. (2) pure competition. (3) monopolistic competition. (4) an oligopoly.

    Q : Price elasticity of demand while price

    Alyssa’s Floral Shoppe dropped its prices for a dozen increases from $45 to $35 in this year. Due to this decrease within price, the quantity sold raised from 1000 to 1500. Therefore the price elasticity of demand for Alyssa’s rises is: (w

    		•
  • Q : Probable demand to be least price

    Of the given, the good for that demand is probable to be least price elastic is: (i) electricity used to light downtown streets. (ii) airline tickets in late December. (iii) Bic pens. (iv) chocolate milk. (v) Merit cigarettes.

    Q : Relation between Implicit Costs and

    I have a problem in economics on Relation between Implicit Costs and Opportunity costs. Please help me in the following question. The Implicit costs are: (1) Opportunity costs. (2) Always variable costs. (3) Similar as the accounting costs. (4) Similar as the explicit

    		•
  • Q : Problem on equal marginal utilities per

    Substitution takes place when prices change and hence demand curves are negatively-sloped since of the behavior of consumers which most directly underpins the law of: (1) Equivalent marginal utilities per dollar. (2) Diminishing net utility. (3) The income effect. (4)

    		•
  • Q : Problem on Agency Shop Agreements Can

    Can someone please help me in finding out the accurate answer from the following question. Needs for all the workers to pay union dues or the equivalent are features of collective bargaining agreements that firms will function: (1) An open shop. (2) A closed shop. (3)

    		•
  • Q : Increase total revenue at a diminishing

    When a monopolist increases output along with elastic demand, then total revenue: (w) increases at a constant rate. (x) increases at an increasing rate. (y) increases at a diminishing rate. (z) All of the above are possible.

  • Q : Resolving principal-agent problems I

    I have a problem in economics on Resolving principal-agent problems. Please help me in the following question. Attempts to resolve the principal-agent problems among stockholders and top corporate managers (that is, CEOs) comprise: (i) Profit-sharing systems for the t

    		•
  • Q : Yellow Dog Contracts-non-union

    The worker who signed a yellow dog contract in the year 1920s agreed: (i) To support the union’s feather-bedding efforts. (ii) Not to work with the ‘scab’ non-union strike-breakers. (iii) To pay the union dues as protection from the violent union org

    		•