5. Using the income elasticity of demand to characterize goods Data collected from the economy of Cardtown reveals that an 11% decrease in income leads to the following changes: • A 9% increase in the quantity of clubs demanded • A 10% decrease in the quantity of flops demanded • A 30% decrease in the quantity of houses demanded Compute the income elasticity of demand for each good and use the dropdown menus to complete the first column in the following table. Then, based on its income elasticity, indicate whether each good is a normal good or an inferior good. (Hint: Be careful to keep track of the direction of change. The sign of the income elasticity of demand can be positive or negative, and the sign confers important information.) Good Income Elasticity of Demand Normal or Inferior Good Clubs Flops Houses Which of the following three goods is most likely to be classified as a luxury good? Flops Houses Clubs
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Answer the next 2 questions according to information below: 1- Suppose that Consumer A's demand for the good (commodity) X has increased in 16 per cent. Because the price of the close substitute good Y has increased in 8 per cent since and his demand for Y has decreased in 2 per cent. In that period of time, his own income has increased in 4 per cent and we know that this affected his demand levels. Calculate the cross elasticity of demand for goods X and Y.(Write below only the magnitude value: A positive integer) 2- Calculate the income elasticity of demand for good X. (Write below only the magnitude value: A positive integer)
Crystal W.
The cross-price elasticity of demand measures the percentage change in the quantity of a good demanded when the price of a different good changes by $1 \% .$ The income elasticity of demand measures the percentage change in the quantity of a good demanded when the income of buyers changes by $1 \% .$ a. What sign might you expect the cross-price elasticity to have if the two goods are shampoo and conditioner? Why? b. What sign might you expect the cross-price elasticity to have if the two goods are gasoline and ethanol? Why? c. What sign might you expect the cross-price elasticity to have if the two goods are coffee and shoes? Why? d. What sign might you expect the income elasticity to have if the good in question is hot stone massages? Why? e. What sign might you expect the income elasticity to have if the good in question is Ramen noodles? Why? f. What sign might you expect the income elasticity to have if the good in question is table salt? Why?
Suppose demand for a product is determined by its price, consumers' income, and the price of a related good. Use Q for demand, P for price, M for income, and PR for price of related good. The demand function is estimated using regression analysis. The results are reported below: SUMMARY OUTPUT Regression Statistics Multiple R: 0.913152135 R Square: 0.833821042 Adjusted R Square: 0.159552605 Standard Error: 530.2842631 Observations: 66 Coefficients Standard Error t Stat P-value Intercept: 125.56 15.87 P: -5.39 3.08 M: 0.069 0.046 PR: -10.98 2.73 Using the values P=100, M=35,000, and PR=40, predict the demand (Q)? (5pts) The demand would be $1,562.36 Using the value of predicted Q you just calculated for part 9), calculate the estimates of: The price elasticity of demand. Show your work. (5pts) The income elasticity of demand. Show your work. (5pts) The cross-price elasticity of demand. Show your work. (5pts)
Adi S.
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