Chapter 6
If the cross-price elasticity of demand is negative, then the products are:
complements, but if it is positive, then the products are substitutes.
If so, then the cross-price elasticity of demand between salt and pepper would be
negative
In this instance, steak in Cape Charles is
normal and a luxury
Therefore, the cross-price elasticity of demand between "substitutes" is most likely________ and the cross-price elasticities of demand between "complements" is most likely_________
positive, negative
Economist X. M. Gao and two colleagues have estimated that the cross-price elasticity of demand between beer and wine is 0.31
substitutes
The income elasticity of demand for a normal good is _____ and for an inferior good is ______.
positive; negative
Normal good
If the quantity demanded of a good increases as income increases, then the good is a normal good.
Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a necessity?
Yes. If the income elasticity of demand is greater than 1, then the good is a luxury. If the income elasticity of demand is positive but less than 1, then the good is a necessity.
If Amazon.com raises its prices by 10 percent and, as a result, the quantity of books demanded on Barnesandnoble.com increases by 35 percent, what do consumers consider the two Web sites to be?
close substitutes
For this consumer's household, which product has the higher price elasticity of demand: bread or lettuce?
lettuce
If the price of flashlights rises while the demand for batteries falls, is the cross-price elasticity of demand between the pair of products likely to be positive or negative?
negative
Complement:
An increase in the price of a complement will lead to a decrease in the quantity demanded, so the cross-price elasticity of demand will be negative.
Suppose income increases by 25 percent and, as a result, the quantity of a particular brand of automobile demanded (holding the price for this particular automobile constant) decreases by 36 percent. The income elasticity of demand for this brand of car is
-36/25= -1.44
Suppose the price of salt increases by 25 percent and, as a result, the quantity of pepper demanded (holding the price of pepper constant) increases by 3 percent. The cross-price elasticity of demand between salts and pepper is In this example, salt and pepper are
.12 substitutes
Substitute:
An increase in the price of a substitute will lead to an increase in quantity demanded, so the cross-price elasticity of demand will positive.
Consider firms selling three goods—one firm sells a good with an income elasticity of demand less than zero, one firm sells a good with an income elasticity of demand greater than zero but less than one, and one firm sells a good with an income elasticity of demand greater than one. In a recession, sales of a good with
an income elasticity of demand greater than one will decline the most and sales of a good with an income elasticity of demand less than zero will increase the most.
In addition, Gao and colleagues have estimated the income elasticity of demand for beer to be minus−0.09. If so, then beer is
an inferior good.
The cross-price elasticity of demand
is positive or negative depending on whether the two products are substitutes or complements.
For this consumer's household, is the cross-price elasticity of demand between lettuce and other green vegetables positive or negative:
positive
Income elasticity of demand is
the percentage change in quantity demanded divided by the percentage change in income.
The cross-price elasticity of demand is
the percentage change in quantity demanded of one good divided by the percentage change in the price of another good.
If the income elasticity of SUVs is greater than 1, what is the good considered?
a luxury
An increase in the price of a substitute for iPads will lead to __________ in the quantity of iPads demanded, so the cross-price elasticity of demand will be _________.
an increase; positive
Suppose that after hurricane Irene, the average income in Cape Charles, Virginia decreased by 2 percent. In response to this change in income, suppose the quantity of steak demanded in Cape Charles (holding the price of steak constant) decreased by 8 percent. What is the income elasticity of demand for steak in Cape Charles? The income elasticity of demand for steak in Cape Charles is
-8/-2= 4
In another example, suppose market research shows that a particular brand of truck is a normal good and a luxury. If so, then the income elasticity of demand for this truck is
greater than 1.
Gao and colleagues have estimated that the cross-price elasticity of demand between beer and spirits is 0.15. If the price of spirits increases by 10 percent, then the quantity of beer demanded will
increase by 15/10 =1.5%
Use income elasticity to distinguish a normal good from an inferior good. For a normal good, the income elasticity of demand will be
positive, but for an inferior good, the income elasticity of demand will be negative.
Inferior good
A good is inferior if the quantity demanded falls when income increases.