Question

1. Estimate own-price and income elasticities for each state and interpret the results. (Please see tables below)

Wisconsin

Quantity	Price	Income
309	29.77	25.59
341	26.49	28.16
600	28.56	54.66
298	32.38	26.15
241	26.15	17.63
202	30.37	14.63
654	27.29	60.42
459	29.44	40.15
490	32.83	44.4
399	36.68	36.91
351	27.39	29.81
157	29.46	10.93
457	28.49	40.72
322	29.16	27.29
306	29.91	25.48
536	32.3	48.43
416	26.44	36.27
411	32.12	35.94
628	29.84	57.61
393	32.37	33.75
446	28.59	39.46
288	32.14	24.19
432	32.22	38.45
350	31.52	29.52
423	31.81	38.05
316	33.36	27.18
275	33.44	24.07
342	28.14	29
454	26.04	40.16
239	30.37	19.74
368	32.19	32.02
407	30.84	35.43
252	31.56	20.19
151	33.11	10.8
314	31.42	26.46
451	34.14	40.69
395	30.52	34.81
229	25.32	17.36
340	28.66	28.36
415	32.2	37.04
476	32.52	43.47
285	26.36	22.97
345	30.79	29.52
420	35.14	38.4
394	34.1	35.73
443	28.5	38.81
393	25.72	33.23
269	30.64	22.66
565	31.27	51.13
515	26.23	46.6

  

If average incomes are expected to rise by 4% in the Midwest in 2019, should O Be Joyful Malting and Cider House focus on increased production in Wisconsin? What else would you like to know before making a decision? Explain your reasoning.

Answer 1

Consider the given problem here the “own price elasticity” of demand measure how much “Q” will respond due to “1%” change in “P”, => mathematically we can write “ed=(dQ/dP)*(P/Q)”. Similarly, the “income elasticity” of demand measure how much “Q” will respond due to “1%” change in “income”, => mathematically we can write “em=(dQ/dI)*(I/Q)”. Consider the following table shows the “own price elasticity” and “income elasticity” for all the given “Q”.

Now, as we can see that the income elasticity is positive, => if “I” increases, => “Q” also increases. But “Q” depends not only on “I” but also on “P”. If “P” increases and other things remains same, => producer will also increase their production and vice versa. So, if “I” increase and “P” decreases then the producer may not increase their production, => we have to make sure that “P” is fixed as before and “I” increases implied “Q” will increases.