Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Hi! So I have a question regarding cross-price elasticity and income elasticity , specifically my textbook example which I don't quite understand. Once I have

Hi! So I have a question regarding cross-price elasticity and income elasticity , specifically my textbook example which I don't quite understand. Once I have the correct values it is very easy to calculate but this thing has been bothering me. So In the example the demand function is Q = 104 - 40p + 20 pt + 0.01Y. At equilibrium Q = 80 and Y = 4000.

Formula: delta Q/delta Pt * Pt/Q. The textbook example then continues and writes that formula then 20 * Pt/Q(cross price) and 0.01 * Y/Q (income elasticity).

In the example of income elasticity:

Q1 = 104 - 40p + 20 pt + 0.01Y

Q2 = 104 - 40p + 20 pt + 0.01Y

delta Q = Q2 - Q1 = 0.01(Y2-Y1) = 0.01(delta Y). So deltaQ/deltaY = 0.01. THIS I dont understand.

My question is how does delta Q/ delta Y = 0.01? It is just the coefficient infront of Y. The same demand function was used when explaining cross price elasticity where delta Q/ delta Pt = 20, again just the coefficient in front of Pt. Is it safe to always assume that delta Q/delta Pt or whatever equals the coefficient in front of Pt or Y, Pg etc (with regards to what is being calculated). For instance if I wanna calculate income elasticity I just go "yeah deltaQ/deltaY = 0.01". Thanks in advance!

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Technical Change, Relative Prices, And Environmental Resource Evaluation

Authors: V Kerry Smith

1st Edition

1317358570, 9781317358572

More Books

Students also viewed these Economics questions

Question

4. What means will you use to achieve these values?

Answered: 1 week ago