Income and cross elasticity of demand

Question 1

Define YED

Answer 1

Measures the responsiveness of demand to a change in household real income

(this means its shifts in demand, not movement along the curve like PED)

Question 2

What is the formula for YED

Answer 2

YED=%change in quantity demand divided by %change in income

Question 3

What are normal goods

Answer 3

Goods with a positive income elasticity
This means as income increases demand increases for these goods

Question 4

What are inferior goods

Answer 4

Goods with negative income elasticity
This means as income increases, demand for these goods decreases

Question 5

What values determine YED

Answer 5

If greater than 0, it is a normal good
If less than 0, it is an inferior good
If between 0 and 1, necessity (inelastic)
If between 1 and infinity, luxury (elastic)

Question 6

Define XED

Answer 6

The responsiveness of quantity demanded to a change in the price of another good

Question 7

What is the formula for XED

Answer 7

%change in quantity demand of good X divided by %change in price of good Y

Question 8

What values of XED determine whether the good is substitute or complementary

Answer 8

Positive means substitute
Negative means complementary

Question 9

What values of XED determine elasticity

Answer 9

elastic if greater than 1
inelastic if less than 1