Najah likes to play tennis. The number of times per year that she plays depends on the price of playing a round of tennis, Najah’s income, and the price of other types of entertainment—in particular, the price of going to a movie instead of playing tennis. The three demand schedules in the following table show how many rounds of tennis per year Najah will demand at each price per round under three different scenarios. In scenario D1, Najah’s income is $60,000 per year and movies cost $10 each. In scenario D2, Najah’s income is also $60,000 per year, but the price of seeing a movie rises to $12. And in scenario D3, Najah’s income goes up to $80,000 per year, while movies cost $12.
|
Scenario |
D1 |
D2 |
D3 |
|
Income per year |
$60,000- |
$60,000- |
$80,000 |
|
Price of movie ticket |
$10 |
$12 |
$12 |
|
Price of tennis |
Quantity Demanded |
||
|
$60 |
20 |
15 |
20 |
|
$45 |
30 |
20 |
35 |
|
$30 |
45 |
25 |
55 |
Required:
a. Using the data under D1 and D2, calculate the cross elasticity of Najah’s demand for tennis at all three prices. (To do so, apply the midpoint approach to the cross elasticity of demand.). Is the cross elasticity the same at all three prices? Are movies and tennis substitute goods, complementary goods, or independent goods?
b. Using the data under D2 and D3, calculate the income elasticity of Najah’s demand for tennis at all three prices. (To do so, apply the midpoint approach to the income elasticity of demand.) Is the income elasticity the same at all three prices? Is tennis an inferior good or normal good?
