An economist estimates the following demand function for tomatoes: Ln (Q) =-6.3-

Question

An economist estimates the following demand function for tomatoes: Ln (Q) =-6.3- 0.52 ln(P,omaaa) + 0.36 ln(PcucumberJ + 0.48 ln(P,ettuce) + 1.09 ln(I) where Q is per capita consumption of tomatoes and / is per capita income. a. What is the own-price elasticity'of demand for tomatoes? (2 marks) b. Is the demand for tomatoes elastic or inelastic? (2 marks) c. What is the cross-price elasticity of demand with respect to cucumbers, and with respect to lettuce? (2 marks) d. How would tomatoes and lettuce be categorized as substitutes or complements? Explain briefly. (2 marks) e. Show whether this demand function is homogenous of degree zero in prices and income, or not. (3 marks)

Explanation / Answer

A) Own price elasticity=-0.52. Thus demand is inelastic

B)demand is inelstic because |Ed|<1

C) Cross elasticity of demand with cucumber=0.36 and with lettuce=0.48

D) both are sunstitie because increase in price of Cucumber and Lettuce both imcreases the demand of tomatoes.

E) no it is not homogenousbof degree zero because there coefficient dont sum to zero.

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