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In: Economics

John thinks that the only way to consume hotdogs, denoted by H, and buns, denoted by...

John thinks that the only way to consume hotdogs, denoted by H, and buns, denoted by B, are together in equal proportions. Hotdogs and buns cost Ph and Pb , respectively, and John has m dollars to spend on the two goods. All this means that John's demand function for hotdogs looks as follows: H= (m/Ph+Pb). The price of a hotdog is twice as high as the price of a bun.

a) Derive the price elasticity of John's demand for hotdogs. Is his demand elastic, inelastic, or unit-elastic?

b) Derive the cross-price elasticity of John's demand for hotdogs with respect to the price of a bun. Are hotdogs a gross substitute or a gross complement of buns?

c) Derive the income elasticity of John's demand for hotdogs. Are hotdogs a normal or an inferior good for John? If it is normal, is it a luxury or a necessity?

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Expert Solution

Rahul Sunny answered 2 years ago
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