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Predicting Changes in Demand

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Question: Suppose that the price elasticity of demand for good X is -2, its income elasticity is 3, its advertising elasticity is 4, and the cross price elasticity of demand between it and good Y is -6. Determine how much consumption changes if:

a) The price of good Y increases by 10%
c) Income falls by 3%

Solution Summary

This solution describes the steps required for determining the changes in demand for the corresponding changes in the price of a good, advertising expenditure and consumer income based upon given elasticity values. All calculations are provided.

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Solution:

a) The price of good Y increases by 10%

Cross Price elasticity of demand = -6
% change in price of good Y = 10%
% change in demand(consumption) of good X = cross price elasticity of demand*% change in price of good Y.
= ...

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• BEng (Hons) , Birla Institute of Technology and Science, India
• MSc (Hons) , Birla Institute of Technology and Science, India
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