Answer to Question #179716 in Microeconomics for Reagan

Question

 The coconut oil demand function is 𝑄 = 1500 − 8.5𝑝 + 14.2𝑝𝑝 + 0.3𝑌. Assume that p is initially 

N$0.55 per kg, 𝑝𝑝 = 𝑁$0.91 per kg and Q=1575 thousand metric tons per year. Calculate income 

elasticity of demand coconut oil.

Answer 1

If p is initially N$0.55 per kg, 𝑝𝑝 = 𝑁$0.91 per kg and Q = 1575 thousand metric tons per year, then:

1575 = 1500 − 8.5×0.55 + 14.2×0.91 + 0.3𝑌,

0.3Y = 66.753,

Y = N$222.51.

The income elasticity of demand for coconut oil is:

Ed = 0.3×222.51/1575 = 0.042.