Question

You are working with the rescarch team that examines the premium lobster roll market in New Haven, CT. There are around 9 restaurants that serve the menu. The team is trying to estimate the demand and supply functions of this market as well as its elasticities. After collecting the data from both consumers and lobster roll shops, they find the information below: The Demand Function is P 40-%Q (or Q 80-2P) (or Q--20+2P) The Supply Function is P-10+ %Q When P is price of a lobster roll, and Q is the number of lobster rolls served per day. (3 points) According to the demand function, when price increases from $25 to $30, what is the price elasticity of demand? Is it elastic or inelastic? Why? Should the lobster roll shops increase the price at that point to increase their revenue? a) b) (3 points) According to the supply function, when price increases from $30 to $40, what is the price elasticity of supply? Is it elastic or inelastic? Why? Name. c) (4 points) The rescarchers find that when the average income of people in New Haven increases from $40,000 to $50,000 they increase their lobster roll consumption by 20 %. What is their income elasticity of demand? Is a lobster roll normal or inferior good for people in New Haven? Why?

Answer 1

Demand Elasticity - Change in de Original do Change in P Original P Re 1.67 Hence the demand is elastica ine, a change in price will lead to a greater change in quantity. Hence the roll shops should not change the price because that will lead to a fall in revenue Supply funchon, Change in Os Original Qs Change in P Original 20 १ who = )-50 The The there time supply is elastic reason of elastic demand and supply are the facts that are many substitutes o lobsters and at the same so lobster is a perishable good

Income Elasticity : Change in Consumption Original Consumption Chaye inancome Onignal income 20 10000 houvo = 0.8 Since it is the income elashcity a necessity good. is less than I, and positive,

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