Q2: Last year, the equilibrium price of strawberries was $4.60 per kilogram and the equilibrium quantity...

Q2: Last year, the equilibrium price of strawberries was $4.60 per kilogram and the equilibrium quantity of strawberries was 5.8 million kilograms. This year, the equilibrium price of strawberries increased to $5.10 per kilogram and the equilibrium quantity increased to 6.2 million kilograms due to an increase in average income from $36,400 to $37,200.

Use this information to answer the following questions.

Hint: Draw the market for strawberries and review the meaning of the four measures of elasticity examined in this course.

a) Why is it impossible to calculate the price elasticity of demand for strawberries from the information given above?

b) Why is it impossible to calculate the income elasticity of demand for strawberries from the information given above?

c) Which measure of elasticity can be calculated from the information given above?

Expert Solution

( a )

We can see that although we have all the data available to calculate price elasticity of demand, however the mostimportant thing while calculating price elasticity of demand is that income has to remain constant. The increase in demand here is due to increase in income. In order to calculate price elasticity of demand there has to be change in demand due to change in price of the item.

( b )

Likewise, in order to calculate income elasticity of demand, there has to be change in demand with sole change in income of the customer. The price must remian constant while calculating income elasticity of demand. That is why it is impossible to calculate income elasticity of demand here in this question.

( c ) We can calculate price elasticity of supply from the above mentioned information.

Rahul Sunny answered 2 years ago

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