Suppose that as my income allocated to sweets increases from

Suppose that as my income allocated to sweets increases from $100 to $250: my consumption of ice cream falls from 20 ice cream cones to 5 ice cream cones. a.

Solution

Answer to question 1:

Y1 = $100      ,   Y2 = $250

Q1 = 20          ,    Q2 = 5

Income Elasticity (E_I) = (5-20) / (250-100)   *   (100 + 250) / (20 + 5)

                              = -5 / 150   * 350/25 = -0.47

Since, income elasticity is less than 0 , it means ice cream cones is an inferior good.

Answer to question 2:

Let Comic book price is denoted as P_C , and quantity of concert ticket is denoted as Q_T .

P_C1 = $3     and   P_C2 = $5

Q_T1 = 400   and   Q_T2 = 500

Cross elasticity of demand (E_c) = (500 - 400) / (5 - 3) *   (3 + 5) / (500 + 400)

                                              = 100/2 * 8/900

                                              = 0.44

Since the Cross elasticity of demand is positive, it means the two good are Substitutes