Problem 10 (Demand Elasticities) Given the demand function for organic processed
ID: 1162283 • Letter: P
Question
Problem 10 (Demand Elasticities) Given the demand function for organic processed pork QD 190- 20P 20Pbeef 2Y 15Z where average Pbeef $4.00/kg, average Y-$12.5 thousands, and Z-1 (a) What is the own price elasticity at the market equilibrium you have solved in Problem7 (2)? What is the economic meaning of the value of the own price elasticity? Suppose during one week, the grocery store sets a promotion price for pork that is slightly lower than the equilibrium price, will the revenue from pork increase or decrease during the promotion week? (6 points) (b) What is the cross price elasticity between pork and beef at the average price of beef and the equilibrium quantity solved in Problem7 (2)? What is the economic meaning of the value of the cross price elasticity? (4 points) (c) What is the income elasticity at the average per capita income of Y-$12.5 thousands, and the equilibrium quantity solved in Problem7 (2)? What is the economic meaning of the value of the income elasticity? (4 points)Explanation / Answer
The Cross-Price and Own-Price Elasticity of Demand are essential to understanding the market exchange rate of goods or services because the concepts determine the rate the quantity demanded of a good fluctuates due to the price change of another good involved in its manufacturing or creation.
In this, cross-price and own-price go hand-in-hand, conversely affecting the other wherein cross-price determines the price and demand of one good when another substitute's price changes and the own-price determines the price of a good when the quantity demanded of that good changes.
As is the case with most economic terms, the elasticity of demand is best demonstrated through an example. In the following scenario, we'll observe the market elasticity of demand for butter and margarine by examining a decrease in the price of butter.
In this scenario, a market research firm that reports to a farm co-operative (which produces and sells butter) that the estimate of the cross-price elasticity between margarine and butter is approximately 1.6%; the co-op price of butter is 60 cents per kilo with sales of 1000 kilos per month; and the price of margarine is 25 cents per kilo with sales of 3500 kilos per month wherein the own-price elasticity of butter is estimated to be -3.
What would be the effect on the revenue and sales of the co-op and margarine sellers if the co-op decided to cut the price of butter to 54p?
The article "Cross-Price Elasticity of Demand" assumes that "if two goods are substitutes, we should expect to see consumers purchase more of one good when the price of its substitute increases," so according to this principle, we should see a decrease in revenue since the price is expected to drop for this particular farm.
190-20(4)+20(4)+2(12.5)+15
Qd = 10
190-20(4)+20(4)+2(12.5)+15
Qd = 10
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