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Hello , the below are kit questions But I did not understand the solution provided by the kit. So please can you answer them
1) For a normal , but inferior good, demand curve slopes upward to the right or does it slopes downward to the right?
2) Product BB15 has reduced its price by 5% which increased sales volume by 12.5% . This price change also caused a fall in sales volume of product CC25 by 2.5%. There was no change in price of product CC25. Calculate cross elasticity of demand?Answer
1) Slopes downward to the right
2) -2.5% / -5% = +0.5Now please explain me
1 The question isn’t great. In economics, normal goods are any goods for which demand increases when income increases, and falls when income decreases but price remains constant. On the other hand inferior goods have better alternatives eg basic brands are inferior to luxury brands. As consumer’s income rises they switch from the inferior goods to the better one. So if you graph quantity (y) against household income (x) the line will slope downwards to the right for inferior goods.
Demand curves plot price against quantity demanded (and normally slope down to the right) but these do not really describe inferior goods (which are identified by their response to income, not price). I don’t know whether the question is bad or is trying to distract you by talking about inferior goods then switching to demand curves.
2 Ordinary elasticity of demand = Proportional change in quantity/Proportional change in price for the same good. Cross elasticity of demand = Proportional change in quantity for good 1/Proportional change in price for good 2
CC25 demand fell by 2.5% in response to a price fall of 5% in BB15. Therefore cross elasticity of demand = 2.5/5 = 0.5 These goods are substitutes so that people will switch towards to one that gets cheaper.
Sir can’t we solve it like this
Proportional change in qty for good BB15 / Proportional change in price for good CC25
= 12.5 / O ( as there was no change in price of good CC25)
= O
As cross elasticity of demand is 0, so the products are unrelated.
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