Question

In: Economics

Suppose at the price of $8 per ton of flour, quantity demand for flour is 50...

Suppose at the price of $8 per ton of flour, quantity demand for flour is 50 thousand tons. However when price changes to $12 per ton, quantity demand for flour decreases to 40 thousand tons and at the same time quantity demand for rice increases from 20 thousand tons to 35 thousand tons.

Calculate Price Elasticity of Demand for flour and comment.

Calculate Cross Elasticity of Demand between rice and flour and comment.

Solutions

Expert Solution

a. Price Elasticity of Demand

Given:

P1 = $8	Q1 = 50000
P2 = $12	Q2 = 40000

Price elasticity of demand =

Price elasticity of demand = (-)2500 * 0.00016 = (-) 0.4

Ed = 0.4 (less than 1)

Relatively inelastic demand: Ed < 1

Relatively inelastic demand means the change in demand of flour is less than that of change in its price.

b. Cross Elasticity of Demand

Given:

Price of flour

(P of good Y)

Quantity of rice

(Q of good X)

P1 = $8

Q1 = 20000

P2 = $12

Q2 = 35000

Cross elasticity of demand = %change in quantity demanded for good X / %change in price of good Y

(or)

Cross elasticity of demand =

Cross elasticity of demand = 3750 * 0.0004 = 1.5

Cross elasticity of demand = 1.5

Exy = 1.5 (greater than 0)

If the elasticity value is greater than zero, then the two goods are said to be substitutes.

Exy > 0 : Substitutes

Rice and flour are substitutes.

Rahul Sunny answered 1 year ago

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