The price elasticity of demand for magazines is 04 The price

The price elasticity of demand for magazines is 0.4. The price elasticity of demand for newspapers is 0.3. The cross elasticity of demand for newspapers with respect to the price of a magazine is 0.6. If the price of a magazine rises by 5 percent, the percentage change in the quantity demanded of magazines is a decrease If the price of a magazine rises by 5 percent, the percentage change in the quantity demanded of newspapers is an increase

Solution

ans 1

the price elasticity of demand of magazine is 0.4

so Em = - % change in quantity demanded of magazine / % change in price of magazine

0.4 = - % change in quantity demanded of magazine / 5

% change in quantity demanded of magazine = - 0.4*5   = -2%

if the price of magazine increases by 5%, the percentage change in quantity demanded of the magazine is a decrease of 2%

ans 2

the cross price elasticity of newspaper with respect to price of magazine is 0.6

En_m= % change in quantity demanded of newspaper / % change in price of magazine

    0.6    =% change in quantity demanded of newspaper / 5

% change in quantity demanded of newspaper = 0.6*5 = 3%

if the price of magazine increases by 5%, the percentage change in quantity demanded of the newspaper is a increase of 3% .

magazine and newspaper are substitute goods as price of magazine increases, deamand of newspaper increases