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 million tons per year.
Is rice an inferior good, a necessity, or a luxury? Explain.
If per capita income increases to $20,500, approximately what will be the quantity demanded rice?
As the income elasticity is 0.8, then rice is a necessity.
If per capita income increases to $20,500, then the quantity demanded of rice will be:
"Qd = 50\u00d7(1 + (20,500\/20,000 - 1)\u00d70.8) = 51"
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