Assume the market demand for wheat may be written as Q = 45 - 2p + 0.3Y + 1pb where Y refers to income and pb refers to the price of barley. Assuming that wheat and barley both sell for $1, and income is $20, calculate the price elasticity, cross price elasticity and income elasticity for wheat
What will be an ideal response?
First, solve for Q = 45 - 2(1 ) + .3(20 ) + 1(1 ) = 50.
Then price elasticity = -2(1/50 ) = -0.04.
Cross price elasticity = 1(1/50 ) = 0.02.
Income elasticity equals .3(20/50 ) = .12.
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A) $25; 260 B) $20; 280 C) $20; 260 D) $15; 260 E) $40; 320
Using the above figure, an increase in the demand for Dutch goods by U. S. consumers will lead to
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