Assume that the demand for a product

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Assume that the demand for a product X is heavily influenced by the price of another product Y (Py), and the income of consumers (I). The cross-price elasticity of X with respect to Y is exy = 1.25, and the income elasticity is eI = 2.

(1) Are X and Y complements or substitutes? Why?

(2) Is X a normal or inferior good?

(3) Suppose now Py decreases by 5%, and consumer income decreases by 1%. Will the quantity demanded of X increase or decrease? By what percent?

Reference no: EM131000038

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