In Canine Ville the price elasticity of demand for dry dog f

In Canine Ville, the price elasticity of demand for dry dog food is 0.8, the income elasticity of demand for dry dog food is 0.2, and the cross elasticity of demand for dry dog food with respect to canned dog food is 0.6. If incomes in Canine Ville increase by 5 percent with no change in the price of a package of dry dog food, the quantity of dry dog food by percent. In Canine Ville, a package of dry dog food is good. In Canine Ville, dry dog food and canned dog food are . a normal; complements an inferior, substitutes a normal; substitutes an inferior, complements

Solution

Here, demand rises by 1%. The good is normal and dry dog food and canned dog food is substitue.

For, imcome elasticity:

e_M=(dq/q)/(dm/m)

or, dq/q=0.2x0.05=0.01 (given dm/m=0.05,income elasticity=0.2)

or, dq/q=1%

Againg income elasticity is positive. Hence, it is normal good and cross price elasticity being positive they are substitutes. For example if price of tea rises, ceteris peribus, its quantity demand falls and demand for coffee rises. Hence, there is a positive relation between price of tea and demand of coffee. So that the cross price elasticity is positive for substitutes.