Question
Assume the market demand for wheat may be written as Q = 45 - 2P + 0.3Y + 1Pb where Y refers to income and
Assume the market demand for wheat may be written as
Q = 45 - 2P + 0.3Y + 1Pb
where Y refers to income and Pb refers to the price of barley. Assuming that wheat and barley both sell for $1, and income is $20.
a.Calculate the price elasticity of demand and describe whether demand is elastic, inelastic or unit elastic.
b.Based on your answer in the previous question concerning the nature of demand (elastic, inelastic or unit elastic), how would an increase in the price of wheat affect total revenue? Is this effect on total revenues always desirable? What other factors would have to be taken into consideration?
c.Determine the cross-price elasticity of demand. Would you describe wheat and barley as substitutes or complements?
d.Determine the income elasticity of demand. Would you describe wheat as a normal or an inferior good?
e.Assume that income and price effects on wheat sales are independent and additive. Assume also that the price of wheat and consumers' income are expected to increase by 2% and 4% respectively. Compute the total effect of those changes on the quantity demanded of wheat.
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