Chapter 6

Normal good

If the quantity demanded of a good increases as income​ increases, then the good is a normal good.

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

If the​ cross-price elasticity of demand is​ negative, then the products​ are:

complements, but if it is​ positive, then the products are substitutes.

For this​ consumer's household, which product has the higher price elasticity of demand​: bread or​ lettuce?

lettuce

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

​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.

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.

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.

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

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.