Question

The market demand for wheat is Q = 100 - 2p + 1pb + 2Y. If the price of wheat, p, is $2,

and the price of barley, pb, is $3, and income, Y, is $1000, what is the income elasticity of

wheat.

Answer 1

$Q = 100 - 2p +1pb + 2Y$

By putting all given values in Q we get

$Q = 100 - (2 × 2) + (1 × 3) + (2 × 1000)$

$Q = 100 - 4 + 3 + 2000$

$Q = 2099$

Income elasticity of wheat (Ey) = $\frac {\Delta Q} {\Delta Y} ×\frac {Y} {Q}$

$Ey = 2 ×(\frac {1000} {2099})$

$Ey = 0.95$

Therefore, here the income elasticity of wheat is 0.95