Problem - Income Elasticity of Demand

 

(a)    Suppose the income elasticity of demand for pre-recorded music compact disks is +4 and the income elasticity of demand for a cabinet maker’s work is +0.4.  Compare the impact on pre-recorded music compact disks and the cabinet maker’s work of a recession that reduces consumer incomes by 10 per cent.

(b)   How might you determine whether the pre-recorded music compact discs and MP3 music players are in competition with each other?

(c)    Interpret the following Income Elasticities of Demand (YED) values for the following and state if the good is normal or inferior; YED= +0.5 and YED= -2.5

(d)   Interpret the following Cross-Price Elasticities of Demand (XED) and explain the relationship between these goods. XED= + 0.64 and XED= -2.6

Summary:

The income elasticity of demand for various goods and services are discussed in the solution.

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