Question

question 1
the percentage change in quantity demanded of one good or service divided by the percentage change in the price of a related good or service is the:
a quantity elasticity of demand.
b. price elasticity of demand.
c. income elasticity of demand.
d. cross - price elasticity of demand.

question 2
when joes income is $100 per week, he spends $20 per week on pizza. when his income rises to $110 per week, he spends $25 per week on pizza. if the price of pizza and all other variables remain constant, this information implies that for joe:
a pizza is a normal good and a necessity.
b. pizza is a normal good and a luxury.
c. demand for pizza is price - elastic.
d. pizza is an inferior good, because his expenditure rose by less than the increase in income.

question 3
the cross - price elasticity of electricity with respect to the price of natural gas has been estimated as being equal to 0.2. this implies that:
a electricity and natural gas are substitutes.
b. electricity and natural gas are complements.
c natural gas and electricity are both normal goods.
d. one of the two goods is inferior and the other is normal, but more information is needed to determine which of them is normal.

Explanation:

• Question 1: Cross - price elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of a related good. Quantity elasticity of demand is not a standard term in this context. Price elasticity of demand measures the responsiveness of quantity demanded to its own price change. Income elasticity of demand measures the responsiveness of quantity demanded to a change in income.
• Question 2: First, calculate the income - elasticity of demand for pizza. Income rises from $100$ to $110$ (a $\frac{110 - 100}{100}=10\%$ increase), and spending on pizza rises from $20$ to $25$ (a $\frac{25 - 20}{20}=25\%$ increase). Since income - elasticity of demand ($\frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in income}}$) is positive and greater than 1, pizza is a normal good and a luxury.
• Question 3: A positive cross - price elasticity of 0.2 between electricity and natural gas implies that when the price of natural gas increases, the quantity demanded of electricity increases. This is the characteristic of substitute goods. Complementary goods have negative cross - price elasticities. Cross - price elasticity does not directly tell us about whether goods are normal or inferior.

Answer:

• Question 1: D. cross - price elasticity of demand
• Question 2: B. pizza is a normal good and a luxury
• Question 3: A. electricity and natural gas are substitutes