Question

Merrick goes to the farmer's market to buy exotic fruit. Last week, he bought 15 rambutan at 20 cents each. This week, rambutan prices increased to 30 cents each, and Merrick buys only 10 rambutan but increases the quantity of star fruit purchased by 100%. Next week, his income increases by 50% because of overtime pay, and he increases his rambutan purchases back to 15. Identify and calculate the different measures of elasticity that can be determined in this example (use the midpoint method). 2-1-1] Calculate own price elasticity of “rambutan”. 2-1-2] Interpret the result of own price elasticity. 2-2-1] Calculate cross-price elasticity between "rambutan". 2-2-2] Interpret the result of cross-price elasticity. 2-3-1] Calculate "income elasticity of rambutan" 2-3-2] Interpret the result of income elasticity.

Answer 1

1) Own price elasticity using the mid-point method

Ed = (Q2 – Q1) / [(Q2 + Q1)/2] / (P2 – P1) / [(P2 + P1)/2]

= (10 – 15)/((10 + 15)/2) divided by (30 – 20)/((30 + 20)/2)

= -1

2) Own price elasticity is -1 which means demand is unitary elastic. When this is the case, there is no change in revenue for a price increase or decrease

3) Cross price elasticity = 100% divided by (30 – 20)/((30 + 20)/2)

= +2.50

4) Since cross price elasticity is +2.50, it implies that rambutan and starfruit are substitutes.

5) Income elasticity = = (10 – 15)/((10 + 15)/2) divided by 50%

= 40%/50%

= 0.8

6) Since it is a positive value, rambutan is a normal good.