Question

Please help

* What is cross-price elasticity of demand? Why is this measurement helpful? What does this metric tell us?

* describe what is meant by the income elasticity of demand. How is it calculated? Why is this significant or meaningful?

Answer 1

1) Cross price elasticity of demand measures responsiveness of quantity demanded of good X following a change in price of a good Y .

This measurement helps to establish the relationship between two goods and helps us determine market changes in one one due to market changes in another .

If it is positive then substitutes , negative then the goods are compliments and if it is zero then the goods are not related .

2) Income elasticity of demand is responsiveness of quantity demanded of a particular good following a change in consumer income . It is calculated by : % change in quantity demanded / % change in income . It tells us how demand for a good changes with income and categorizes good based on that . As for example if elasticity value is > 0 then it is normal good , < 0 then it is inferior good .