Question

Question 9 The table below shows Angelina's quantity demanded for goods at different prices. Use this information to answer the questions below. Goods Meat Noodles Spaghetti Fish Quantity Demanded 2015 2016 500kg 700kg 200 packets 120 packets 50 packets 60 packets 200kg 150kg 2015 $7 $0.12 $0.30 $8 Prices 2016 $8 $0.70 $0.30 $12 a) Determine own price elasticity of demand for meat. b) Using the quantity demanded for meat, determine the cross price elasticity of demand between meat and fish. c) Using your answer in b above, mention and explain the type and relationship between both goods. d) If Angelina's income in 2015 was $36,000, she got promoted in 2016 and her income increased to $72.000, determine the income elasticity of demand for meat and noodles, e) Briefly explain your answer in d.

Answer 1

a. price elasticity for meat = {(700-500)/[700+500]/2} / {(8-7)/[(8+7)/2}

= {200/1200} / {1/15}

=2.5

b. cross price elasticity of meat and fish = {(700-500)/[700+500]/2} / {(12-8)/[(12+8)/2}

= {200/1200} / {4/20}

=0.833

c. cross price elasticity of meat with respect to price of fish is positive and 0.833 which means that when price of fish increase be $1, quantity of meat demanded increase by 0.833 unit. therefore meat and fish are substitute goods, as fish becomes costlier, demand for meat increases.

d. change in income = 72000-36000 = 36000

income elasticity for meat = {(700-500)/[700+500]/2} / {(72000-36000)/[(72000+36000)/2}

= {200/1200} / {36000/108000}

=0.5

income elasticity for noodle = {(120-200)/[120+200]/2} / {(72000-36000)/[(72000+36000)/2}

= {-80/320} / {36000/108000}

=(-)0.75

d. income elasticity for meat is 0.5 which means that meat is a normal good as it is positive and when income increases by $1, demand for meat increase by 0.5 unit. however, since income elasticity for noodles is (-)0.75, noodles is inferior good, as income increase by $1, demand for it falls by 0.75 unit.