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ECON-200 Lecture Notes - Lecture 9: Normal Good

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18 Sep 2020

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Income elasticity of demand (ieod) measures the response of qd to a change in consumer income. Income elasticity of demand=% change in qd% change in incomeincome elasticity of deman d=% change in qd% change in income. Recall from supply and demand review: an increase in income causes an increase in demand for a normal good. Hence, for normal goods, income elasticity > 0. For inferior goods, income elasticity < 0. Cross-price elasticity of demand (cpeod) measures the response of demand for one good to changes in the price of another good. Cross price elast. of demand=% change in qd for good 1% change in p of good 2cross price el ast. of demand=% change in qd for good 1% change in p of good 2. For substitutes, cross-price elasticity > 0 (e. g. , an increase in price of beef causes an increase in demand for chicken)

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Related Questions

Ch. 6: Simple Pricing

a. define the Law of Demand?

b. Explain the distinction between a change in demand and a change in quantity demanded?

c. create a demand curve from a simple demand schedule in Table 6.2?

d. determine the calculated values in a table such as Table 6.4?

e. Can you apply your understanding of Chapter 4s marginal analysis to pricing decisions in a price-making (versus price-taking) firm?

f. Can you explain in words what Own Price Elasticity, Cross-Price Elasticity, and Income Elasticity mean?

g. Given specific values for Own-Price Elasticity of Demand, can you determine whether demand for the good is elastic, inelastic, or unit elastic?

h. Given specific values for Cross-Price Elasticity, can you determine whether the two goods are substitutes or complements?

i. Given specific values for Income Elasticity, can you determine whether the good is a normal or inferior good?

j. Can you calculate each of these elasticities, such as in the homework?

k. Identify relatively elastic and inelastic demand curves?

l. List factors that may affect demand elasticity.

m. Indicate whether total revenue will increase or decrease as a result of a price change, depending on the demand elasticity?

The textbook used for this assignment is Managerial Economics, Froeb Chapters.

2. Income?Qd of Hamburger??Qd of Steak

Per month? per month?per month

Month 1?$750?8 lbs.?2 lbs.

Month 2?$950? 5 lbs.?4 lbs.

a. What is the income elasticity of demand for hamburgers?

b. What is the income elasticity of demand for steak?

c. From our study of demand in an earlier chapter, we know ___________is a normal good, whereas _______________is an inferior good.

3. Suppose the price of Butter Pecan Ice Cream has recently risen by 10% due to an increase in the cost of pecans used to make the ice cream. As a result, fewer Butter Pecan ice cream cones are being sold in the ice cream store where you work. You do some checking and find that Raspberry Chip ice cream cone sales are up 4%. What is the cross-price elasticity of Butter Pecan and Raspberry Chip ice cream cones? Are these two goods complements or substitutes?

12. If the price rises, the quantity supplied will be greater the

a. Longer the time that elapses.

b. More income elasticity is good.

c. Higher the price elasticity of demand for the good.

d. All of the above.

13. If the price elasticity of demand is -.5 and quantity demanded increases by 5%, the price must have

a. Increase by 10%

b. Decreased by 10%

c. Increased by 2.5%

d. Decreased by 2.5%

carmineotter908

1. When demand is inelastic, a decrease in price will cause

a. an increase in total revenue.

b. a decrease in total revenue.

c. no change in total revenue but an increase in quantity demanded.

d.no change in total revenue but a decrease in quantity demanded.

2. For which of the following types of goods would the income elasticity of demand be positive and relatively large?

a. all inferior goods

b. all normal goods

c. goods for which there are many complements

3. Which of the following should be held constant when calculating the income elasticity of demand?

a. the quantity of the good demanded

b. the price of the good

d. All of the above should be held constant.

4. Suppose goods A and B are substitutes for each other. We would expect the cross-price elasticity between these two goods to be

c. either positive or negative. It depends on whether A and B are normal goods or inferior goods.

d. either positive or negative. It depends on whether the current price level is on the elastic or inelastic portion of the demand curve.

5. As the price elasticity of supply increases, the supply curve

a. becomes flatter

b. becomes steeper

c. becomes downward sloping.

d. shifts to the right.

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