Suppose the Price Elasticity of demand for good X is 2 its I

Suppose the Price Elasticity of demand for good X is –2, its Income Elasticity is 1.5, its Advertising Elasticity is 3.0, and the Cross – Price elasticity of demand between it and

good Y is – 2.5.

Determine how much the consumption of this good X will change if

Part a – The price of good X decreases by 10 percent.

Part b – The price of good Y decreases by 10 percent.

Part c – Advertising increases by 10 percent.

Part d – Income increases by 10 percent.

Solution

part A:

Price elasticity of demand for good X = % change in the demand for good X / % change in the price for good X

-2 = % change in the demand for good X / -10%

% change in the demand for good X = 20%

Part b

Cross – Price elasticity of demand = % change in the demand for good X / % change in the price for good Y

-2.5 = % change in the demand for good X / -10%

% change in the demand for good X = 25%

part c

Advertising Elasticity = % change in the demand for good X / % change in advertising

3 = % change in the demand for good X / 10%

% change in the demand for good X = 30%

part d:

Income Elasticity =  % change in the demand for good X / % change in income

1.5 = % change in the demand for good X / 10%

% change in the demand for good X = 15%