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Cross-Price Elasticity
Suppose the demand for Apple iPhones is characterized by the following point elasticities: (own) price elasticity = -.12, cross-price elasticity with Blackberry phones = +.03, and income elasticity = 1.5. Based on these numbers, answer the following questions. Explain your answers and show your work.
a. What would happen to the demand for iPhones if consumer income rises by 10%? Be specific. Are iPhones a normal or an inferior good? Explain.
b. The price of iPhone recently was raised 10%, but, after the price increase, revenue from iPhone sales increased. If the 'law of demand' tells us that an increase in price leads to a decrease in quantity demanded, how can the above be explained? Support your answer using the information provided.
c. How would the demand for iPhones change if the price of a Blackberry rose by 2%? Are the two goods strong or weak substitutes? Be specific and explain your answer using the information provided.
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