Question

1. If the cross-price elasticity of Coke/Pepsi is +0.63, what is relationship between the price of Coke and the demand for Pepsi?

2. If the cross-price elasticity of large SUVs/Gasoline is -0.42, what is the relationship between the price of gasoline and the demand for large SUVs?

3. When Alec’s income increases by 10%, his consumption of vitamins increases by 15% while his consumption of Top Ramen drops by 20%. Calculate Alec’s income elasticity of demand for vitamins and income elasticity for Top Ramen.

Answer 1

• Cross price elasticity between Coke and Pepsi is +0.63, shows that both these products are substitutes to each other which represents demand for Pepsi falls when price of Coke falls and vice versa.
• Cross price elasticity between SUVs/Gasoline is -0.42 shows that both these goods are complement to each other which represents that as price if Gasoline rises, demand for SUVs falls and vice versa.
• Increase in Alec's income = 10%

Increase in Consumption of vitamins = 15%

Income elasticity = %change in quantity demanded / %change in income

Income elasticity of vitamin = 15% / 10% = 1.5

• Increase in Alec's income = 10%

% change in demand for Ramen = -20%

Income elasticity for Ramen = -20% / 10% = -2