Suppose that both wheat and corn have an income elasticity of 0.2. a. If the ave

Question

Suppose that both wheat and corn have an income elasticity of 0.2. a. If the average income in the economy increases by 4 percent each year, by what percentage does the quantity demanded of wheat increase each year, holding all other factors constant? Holding all other factors constant, if 14 billion bushels are demanded this year, by how many bushels will the quantity demanded increase next year if incomes rise by 4 percent? ________ million bushels b. Given that average personal income doubles in the United States about every 30 years, by about what percentage does the quantity demanded of corn increase every 30 years, holding all other factors constant? _______%

Explanation / Answer

Income Elasticity = % quantity/ % Income.

(a) % Income = 4, so % quantity = % Income x elasticity = 4 * 0.2 = 0.8%

So if 14 billion bushels are demanded this year, then if incomes rise by 4 percent then change in quantity would be 0.8% rise so quantity = 14*1.008 = 14.112

(b) b. Given that average personal income doubles in the United States about every 30 years, % quantity demanded of corn = % Income x elasticity = 100*0.2 = 20%

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