1. If there has been a 10% increase in Consumer income between two periods, what
ID: 1186878 • Letter: 1
Question
1. If there has been a 10% increase in Consumer income between two periods, what was the percentage change in demand for foreign travel? For tobacco products? For flour? (Hint use the income elasticity values in Table 4-4.)
2. Agricultural commodities are known to have a price-inelastic demand and to be necessities. How can this information allow you to explain why the income of farmersfalls (a) after a good harvest? (b) In relation to the incomes in other sectors of the economy?
3. Suppose that the cross-price elasticity of demand between McIntosh and Golden Delicious apples is 0.8, between apple and apple juice is 0.5, between apples and cheese is 0.4, and between apples and beer is 0.1 What can you say about the relationship between each set of commodities?
4. (a) If price of pork increases by 10 percent, by how much does demand for beef change? (b) If price of pork increases by 10 percent, by how much does demand for food change? (hint use the cross-price elasticity values in Table 4-5.)
Explanation / Answer
2)Of course, agricultural economics is atypical to all other economics for numerous reasons, but let's focus on why they cause farmer's income goes down.
A.
After a good harvest, a farmer may produce alot of food (agricultural products). However, if one farmer makes alot, since it is based usually only on a few factors, so does every other farmer making the same good. This surplus of food causes prices to fall.
Where in normal markets, if prices fall, consumer demand goes up, but since consumer hunger is inelastic (if infinite food were made available, we couldn't eat infinitely), they won't buy any more food than they previously did. And since food is perishable, they can't stock up for when there are shortages or prices go back up.
So, alot of the time, after a good harvest, the farmer has the same amount of food that consumers are willing to buy at less the price, so they lose money.
B.
That difference also explains why their income falls in relation to the incomes in other sectors of the economy, that even if prices go up, you still can only sell about the same quantity of food (as your land allows). Also, this explains technology too, as more technology can improve crop production, but still doesn't increase consumer needs.
More specifically, as consumer income increases, the need for food remains the same. As a consumer, if I make $10,000 and spend $9,000 on food, I don't have much money to spend elsewhere. Now, if I get a huge raise and make $100,000, and still only need $9,000 in food, then I will spend the remain $91,000 in other sectors, like entertainment or computers, etc.
The only way profits increase in agricultural is if the population increases, while profits elsewhere are based on incomes.
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