Explain the concepts of cross-price elasticity of demand and income elasticity of demand. What do positive and negative values indicate for each of these demand elasticities?
What will be an ideal response?
Cross-price elasticity of demand measures the percentage change in quantity demanded of one good based on the percentage change in the price of another good. If cross-price elasticity is positive, the two goods are substitutes. If cross-price elasticity is negative, the two goods are complements.
Income elasticity of demand measures the responsiveness of quantity demanded to changes in income. If income elasticity is positive but less than one, the product is a normal good and a necessity. If income elasticity is positive and greater than one, the product is a normal good and a luxury. If income elasticity is negative, the product is an inferior good.
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Normal Good
What will be an ideal response?
Looking at inflation rates in the United States since the 1970s we see that
A) inflation fell the most during the 1970s productivity slowdown. B) the highest inflation rates were the double digits during the 1990s. C) the inflation rate increased with the increased growth of the 1990s. D) the 1970s experienced the highest inflation rates.