CHAPTER 10 INCOME AND CROSS ELASTICITIES

Question 1

Complement

Answer 1

A good that is purchased with other goods to satisfy a want. Complements have a negative cross elasticity of demand with each other.

Question 2

Cross elasticity or cross- price elasticity of demand

Answer 2

A measure of the responsiveness of quantity demanded of one good to change the price of another good. It is measured by dividing the percentage change in quantity demanded of one good by the percentage change of the other good.

Question 3

Income elasticity of demand

Answer 3

A measure of the responsiveness of quantity demanded of one good to change the price of another good. It is measured by dividing the percentage change in quantity demanded of one good by the percentage change in income.

Question 4

Inferior good

Answer 4

A good where demand falls when income increases( i.e. it has a negative income elasticity of demand)

Question 5

Normal good

Answer 5

A good where demand increases when income increases (i.e. It has a positive income elasticity of demand)

Question 6

Substitute

Answer 6

A good which can be replaced by another to satisfy a want. Substitutes have a positive cross elasticity of demand with each other.