Numbers 2 and 3 please. 1. Presented below is a table of elasticities for To the
ID: 1105271 • Letter: N
Question
Numbers 2 and 3 please. 1. Presented below is a table of elasticities for To the take any row read the elasticity of quantity demanded for the good in that row in response to changes in the prices of the goods listed at the head of each column. For example, e 0.63 is the estimated own price elasticity of demand for milk, and the elasticity of the demand for milk with respect to cheese prices, emo is-0.01. dairy products. read table, and Milk 0.63 0.04 Cottage Cheese 0.34 0.30 Commodity Prices Cheese Cottage Cheese Butter 0.01 0.52 -0.02 -0.04 Demands Milk Cheese 0.03 0.00 1.10 0.21 0.02 0.01 -0.16 0.73 Butter Many of the cross-price elasticities for the dairy products are negative, but it is intuitive that altermate dairy products might be substitutes for each other. Is this intuition wrong, are the elasticities wrong, or is there another explanation that might explain the paradox of the negative cross-price elasticities? 2. Verify that the three properties of elasticity hold for Cobb-Douglas Utility with U-X2x), Engel Aggregation, Homogeneity, and Slutsky Equation). 3. To begin, write down the budget constraint for a two-good model (good X and good Y). Then substitute the Marshallian demand functions into the budget constraint and differentiate the resulting identity with respect to price of X. Express it in terms of own and cross-price elasticities
Explanation / Answer
It is correct that alternate diary products must have substitutes for each other. This is the reason that the price is reflecting in negative. The demand for alternate product of milk have rised and hence the price of milk has gone down and reflecting in negative. This is due to cross price elasticity concept. Cross-Price Elasticity of Demand (sometimes called simply "Cross Elasticity of Demand) is an expression of the degree to which the demand for one product, let's call this Product A changes when the price of Product B changes. This is the same case with milk and butter. As the quantity demanded for cheese changes the price of milk changes. This can be one of the reason why the price of milk is reflecting in negative. C) Any combination of the two goods that are on or beneath the budget constraint are affordable, while those to the outside (farther from the origin) are unaffordable. The budget constraint indicates the combinations of the two goods that can be purchased by the consumer’s income and prices of the two goods at a particular point of time. The intercept points or cross points of the budget constraint are computing by dividing the income by the price of the good. For example, if the consumer had Rs8 to spend and the price of pizza was Rs2 and cold drinks were Rs1, then the consumer could buy four pizzas (8/2) or eight shakes (8/1). Any combination of the two goods that are on or beneath the budget constraint are affordable, while those to the outside (farther from the origin) are unaffordable.
The economics concepts of income effect and substitution effect express changes in the market and their impact on consumption patterns for consumer goods and services. The income effect expresses the impact of increased purchasing power on consumption, while the substitution effect describes how consumption is impacted by changing relative prices. Different goods and services experience these changes in different ways. Some products, called inferior goods, generally decrease in consumption whenever incomes increase. Consumer spending and consumption of normal goods typically increases with higher purchasing power, in contrast with inferior goods.
Luxury items are normal goods. Typically, higher-income households spend more on luxury items. As household income and purchasing power increase, more luxury goods are sold and demand for these products increases. Demand for normal goods and demand for inferior goods have negative covariance. In other words, they move in inverse directions. They are inversly proportional to each other.
The substitution effect is caused solely by the change in price of a consumer item. The price effect relates directly to the change in price of an item, or value, which makes an impact on the consumer demand for a product or service in a particular market.
To summarise: The price effect encompasses two different ideas of Mrashall demand function : the substitution effect and the income effect. The substitution effect directly relates to consumers replacing items with less-expensive alternatives when either prices increase or consumers' income decreases. Comparatively the income effect is just the opposite. As a consumer's income increases, the cost of goods purchased is generally higher, and the consumer begins to replace the lesser-quality items that came at a lower expense with items that are of a higher quality and thus more costly.
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