True or False:

1)If the price elasticity of demand is equal to 1, then demand is unit elastic.

2)If the income elasticity of demand for a good is negative, then the good must be an inferior good.

3)The cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes.

1) Ans: True

Price elasticity of demand (PED) refers to the degree of responsiveness of quantity demanded of a good due to a change in the own price of that good. In other words, PED states that how much quantity demanded changes due 1% change in price of the good.

• If Price elasticity of demand is greater than1, then demand is elastic.
• If Price elasticity of demand is less than1, then demand is inelastic.
• If Price elasticity of demand is equal to 1, then demand is unit elastic.

2) Ans: True

Income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income. It means how much quantity demanded changes due a change in income.

• If income elasticity of demand is positive, then the good is a normal good.
• If income elasticity of demand is negative, then the good is an inferior good.

3) Ans: True

Cross-price elasticity of demand is defined as the degree of responsiveness of quantity demanded of a good due to a change in the price of a related good.

• If cross-price elasticity of demand is positive, then the goods are substitutes.
• If cross-price elasticity of demand is negative, then the goods are complementary.