THE FOLLOWING IS THE DEMAND FUNCTION FOR SUGAR: Qs = 20 -5Ps + 3Pe + 6Y...

Question

Question

THE FOLLOWING IS THE DEMAND FUNCTION FOR SUGAR:

Q_s = 20 -5P_s + 3P_e + 6Y

Where Q_s = demand for sugar (in pounds)

P_s = $5 = price of “sugar” for pounds

P_e = $100 = price of “equal” pounds

Y = $200 = per capital income for a week

What is the demand for sugar Q_s?
Compute and interpret (using a one percent change) the price elasticity.
Compute and interpret (using a one percent change) the cross price elasticity.

Compute and interpret (using a one percent change) the income elasticity.

Answer 1

Answer #1

Demand : Qs = 20 - 5 x 5 + 3 x 100 + 6 x 200 = 1495

Price elasticity = dQs/Ps x Ps/Qs = -5 x 5/1495 = - 0.017

Cross price elasticity = dQs/dPe x Pe/Qs = 3 x 100/1495 = 0.2

Income elasticity = dQs/dY x Y/Qs = 6 x 200/1495 = 0.8

Answer 2

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