Question

You are the manager of a meat-processing plant and are making decisions about contracts to obligate beef producers to furnish you meat over the next 3 years. Researchers at your firm have estimated the income elasticity of demand for nonfed ground beef to be -1.6. Today you read in The Wall Street Journalthat economists are forecasting a small upturn in our dismal economy over the next three years with an expected increase in consumer income of about 5% over the three-year period. How will this forecast affect your contracts for future purchases of nonfed cattle? Be specific.

Answer 1

The income elasticity of demand for non fed ground beef is -1.6. this indicates that non fed ground beef is inferior in nature so that when income is increased, it's demand is likely to decrease.

It is given that there is an expected increase in the income by 5% over the next three year period. It indicates that the demand for non fed ground beef will decrease in the coming years, where quantity demanded will decrease by 1.6*5 = 8%.

With reduced expected sales, the manager is likely to demand a low volume of beef from beef producers. Therefore this information is likely to affect the contract in that the demand for future purchases of non fed cattle will decline.