In Video Ville the price elasticity of demand for camcorders

In Video Ville, the price elasticity of demand for camcorders is 1.6, the income elascity of demand for camcorders is 0.1, and the cross elasticity of demand for camcorders with respect to digital cameras is 0.2.

Solution

Income elasticity of demand for camcorders = 0.1

Percentage change (increase) in income = 3%

Income elasticity of demand for camcorders = percentage change in quantity demanded/percentage change in income

0.1 = percentage change in quantity demanded/3%

Percentage change in quantity demanded = 0.3%

Thus, quantity demanded of camcorders has changed by 0.3% due to increase in income by 3%.

Since, income elasticity of demand for camcorders is positive therefore it is a normal good. Demand for normal good increases as income increases.

So, if income in Video Ville increases by 3% with no change in price of a Camcorder, the number of Camcorders demanded increases by 0.3%.

Normal goods have positive income elasticity of demand while inferior goods have negative income elasticity of demand.

In Video Ville, income elasticity of demand for camcorders is positive therefore Camcorder is a normal good in Video Ville.

Positive value of cross-elasticity of demand between two goods implies that two goods are substitutes while negative value of cross-elasticity of demand between two goods implies that two goods are complements.

In Video Ville, cross-elasticity of demand for camcorders with respect to digital cameras is positive, therefore the two goods are substitutes.

Thus,

In Video Ville, a Camcorder is normal good. In Video Ville, Camcorder and digital camera are Substitutes.

Hence, the correct answer is option (A).