Chamberlain College of Nu lCorse Hore page Take Krysiak

Chamberlain College of Nu l-Corse Hore page @ Take , Krysiak × |+ Test: Mid-Term Exam Time Remaining, 3: 027 This question: 5ps In Music Ville, the price elasticity of demand for CD players is 1.3, the incoeme elasticity of demand for CD players is 0 4, and the cross clasticity of demand for CD players with respoct to MP3s is 1 If inconnes in Music Ville increase by 15 percent with no change in the price of a CD player, the num or of CD players by perost In Music Ville, a CD player is OA an inferior, substitutes OB an inferioe, complements OC a nommal; complements @D a sormal; sabstitutes .pod. In Music Ville, CD players and MP, are

Solution

Income elasticity of demand for CD players = 0.4

The value of income elasticity of demand for CD players in Music Ville is positive. This means CD players is a normal good in Music Ville because normal goods have positive income elasticity of demand.

In case of normal good, increase in income leads to increase in quantity demanded of good.

% increase in income = 15%

Income elasticity of demand = % increase in quantity demanded of CD players/% increase in income

0.4 = % increase in quantity demanded of CD players/15%

% increase in quantity demanded of CD players = 6%

Thus,

If income in Music Ville increase by 15 percent with no change in price of a CD player, the number of CD players demanded will increase by 6 percent.

Cross-price elasticity of demand for CD players with respect to MP3s is 0.1

Positive value of cross-price elasticity of demand for DC players with respect to MP3s indicates that two goods are substitutes because substitutes goods have positive cross-elasticity of demand.

Thus, in Music Ville, a CD player is normal good. In Music Ville, CD players and MP3s are subtitutes.

Hence, the correct answer is option (D).