Cross & income elasticity of demand

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Intros
Lessons
  1. Cross & Income Elasticity of Demand Overview:
  2. Cross Elasticity of Demand
    • Formula for Cross Elasticity of Demand
    • Do not take the absolute value
    • Positive  →  goods are substitutes
    • Demand curve for good shifts rightward
    • Negative  →  goods are complements
    • Demand curve for good shifts leftward
  3. Cross Elasticity of Demand
    • Formula for Income Elasticity of Demand
    • Do not take the absolute value
    • Positive  →  goods are normal
    • Negative  →  goods are inferior
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Examples
Lessons
  1. Calculating Cross Elasticity of Demand
    Suppose that a company decides to increase the price of juice by 20%. By doing this, they see a 15% increase in the quantity of coffee.
    1. Find the cross elasticity of demand for coffee in respect to apple juice
    2. State whether juice is a substitute or a complement.
    3. What happens to the demand curve for coffee?
  2. A company decides to increase their price of candy from $5 to $10. By doing so, the quantity of water decreases from 80 to 50, and decreases the quantity of candy from 100 to 50.
    1. Calculate the price elasticity of demand for candy using arc elasticity of demand. Is it elastic, inelastic, or unit elastic?
    2. Calculate the cross elasticity of demand for water in respect to candy. Are candies a substitute or a complement?
  3. Calculating Income Elasticity of Demand
    If Kevin's income increases from $100 to $150 a day, he increases his demand for ice cream by 10%, and decreases his demand for coffee by 20%. Calculate Kevin's income elasticity of demand for
    1. Ice cream
    2. Coffee
  4. If Patsy's income increases from $50 to $100 a week., she increases her demand for chocolate from 2 kg to 5 kg.
    1. Calculate the income elasticity demand for chocolate.
    2. Is chocolate a normal good or inferior good? Why?
    3. Is the income elastic or inelastic? Why?