Answer to Question #167548 in Microeconomics for Yerbo Emmanuel

Question

Suppose that when the price of roasted plantain rises by 10%, demand for Peanuts falls by 3%at the current price, and that when income rises by 10%,demand for roasted plantain increases by 1%at current price.calculate the cross elasticity of demand for Peanuts with respect to the price of roasted plantain and tell whether roasted plantain and Peanuts are substitute or complements.calculate the income elasticity of demand and tell whether roasted plantain is normal or inferior .

Answer 1

Let Cross elasticity of demand represent CED.

Therefore,

CED= % change in demand of peanut divided by % change in price of plantain.

Therefore CED= 3% divided by 10%

CED = 0.3.

The goods in question are substitute since the cross price elasticity of Demand coefficient is positive. This means that as the price of plantain increases, demand for peanut will increase.

ii. Let income elasticity of supply represent YED.

Therefore,

YED= % change in Quantity demand divided by % change in income.

YED= 1% divided by 10%

YED= 0.1.

This shows that it is a normal good because the income elasticity of demand coefficient is positive but less than one. This means that as income increases by a given percentage, the demand for the good will increase less than the given percentage increase.