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Income and Cross Elasticity of Demand

Question 1

In each of the following 8 cases, identify what the product is:

YED/XED is: The product is: Give one example
XED = 0    
YED = + 10.0  
YED = - 0.2    
XED = + 0.2    
XED = + ∞    
YED = + 0.3    
XED = + 12.0    
YED = - 15.0    
  1. A normal good with an inelastic response

  2. A normal good with an elastic response

  3. An inferior good with an inelastic response

  4. An inferior good with an elastic response

  5. A close substitute

  6. Not a close substitute

  7. A close complement

  8. Not a close compliment

  9. A perfect substitute

  10. A perfect complement

  11. Goods are not related

   See: answer


Question 2

You own shares in two firms, Wheat Products Ltd (WPL) and Flashy Games Ltd (FGL). WPL is a chain of farms producing wheat that is sold to millers. FGL is a computer software company making computer games for the fast growing computer games market.

You have conducted some research and found that, on average, YED for wheat products is – 2.0 and for computer games is + 4.0.

You have received an economic forecast that tells you that the UK’s national income will grow by 3% next year.

Using diagrams, assess the likely impact of the change in national income on your two firms.

  1. The forecast for 5 years time in that the UK economy will go into recession, with a predicted fall in national income of 2%.

  2. Using diagrams, assess the likely impact of this change on your two firms.

  3. What strategies could your two firms adopt to reduce the risks associated with changes in national income?