Question

The price elasticity for rice is estimated to be -0.4 and the income elasticity is 0.8. At a price of $0.40 per pound and a per capita income of $20,000, the demand for rice is 50 milllion tons per year

a) is rice an inferior good, a necessity or a luxury? explain.

b) if per capita income increases to $20,500, what will be the quantity demanded of rice?

Answer 1

The price elasticity $-0.4$

Income elasticity $0.8$

Price $=\$0.40$ per pound

Income (I) $=\$20,000$

$Qd=50$ million tons per year.

a).

Since the income elasticity of demand is $0.8 (E<1)$, rice is an inferior good.

b).

An increase in per capita income to $\$ 20,500$ this will lead to rice in the quantity demanded;

$=0.8\times \frac {20,500-20,000}{20,000}$

$=0.02 \space or \space + 2\%$

Hence the new quantity demanded is;

$Qd=50\times 1.02$

$=51\space million \space tons$