1. Suppose the own price elasticity of demand for good X is - 3, it's income elasticity is 1, its advertising elasticity is 2, and the cross-price elasticity of demand between it and good Y is - 4, determine how much the consumption if this good will change if:

a) The price of good X decreased by 5%

b) The price of good Y increased by 8%

c) Advertising decreased by 4%

d) Income Increased by 4%

2. Suppose the cross price elasticity of demand between X and Y is 4, how much would the price of good Y have to change in order to increase the consumption of good X by 20%?

A) X Demand fall 15%; B) X Demand fall 32%; C) X Demand fall 8%; D) X Demand rise 4%. 2] Price (Y) rise 5%

Explanation:

Elasticity is the responsive change in demand of a good, due to any factor affecting it.

Elasticity = % change in demand / % change in factor affecting demand So, % change in demand = % change in factor x Elasticity

Given : Price Elasticity = - 3, Income Elasticity = 1, Advertising Elasticity = 2, Cross Price Elasticity = - 4

A) Price of good decrease by 5% : So, Demand would change by 5 x price elasticity, 5 x - 3 i. e - 15% (demand fall)

B) Price of good Y increase by 8% : So, X's Demand would change by 8 x - 4 i. e - 32 % (demand fall)

C) Advertising decreased by 4% : So, X's demand would change by - 4 x 2 i. e - 8% (demand fall)

D) Income increase by 4% : So, X's demand would change increase by 4 x 1 i. e 4% (demand rise)

2. Cross Price Elasticity = 4; Desired change in quantity = 20% increase

Elasticity (4) = desired % change in demand (20%) / % change in Y price

% change in Y price = 20 / 4 = 5 % (price rise)