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 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?  

Answer 1

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:

$Qd = 50×(1 + (20,500/20,000 - 1)×0.8) = 51$