Source: Blundell, Richard Consumer Behavior: Theory and Empirical Evidence -A Su

Question

Source: Blundell, Richard Consumer Behavior: Theory and Empirical Evidence -A Survey The Economic Journal, March 1988 Table 2 Price and Income Elasticities, Part a) Households with Children Note: Price elasticities are compensated elasticities; This table is also reproduced in Dixit,Microeconomics Effect of a 1% Increase in On demand for Fuel Alcohol Clothing Transport Services Income 0.668 2.014 0.329 1.269 1.212 1.654 Price of 0.246 0.210 0.464 0.231 0.048 -0.012 0.032 1.869 0.671 0.042 0.345 0.114 0.110 1.043 0.718 0.023 0.257 0.181 0.021 0.999 0.480 0.163 0.475 0.298 0.004 0.218 0.223 0.045 0.197 0.587 0.066 Alcohol Clothing Transport Services 0.027 0.716 0.106 0.034 ne

Explanation / Answer

Food and fuel are substitute, because with increase in price of fuel, the demand of food increases. It only happens when products are substitutes to each other. Though it is a weak relationship between food and fuel. As per the given data, with 1% increase in price of foods, there is .11 increase in the demand of fuel. It shows a relationship of substitutes.

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