Assume the market demand for wheat may be written as Q = 45 – 2p + 0.3

Assume the market demand for wheat may be written as Q = 45 – 2p + 0.3Y + 1pb where Y refers to income and pb refers to the price of barley. Assuming that wheat and barley both sell for $1, and income is $20, calculate the price elasticity, cross price elasticity and income elasticity for wheat.

What will be an ideal response?

ANSWER

First, solve for Q = 45 – 2(1 ) + .3(20 ) + 1(1 ) = 50.
Then price elasticity = -2(1/50 ) = -0.04.
Cross price elasticity = 1(1/50 ) = 0.02.
Income elasticity equals .3(20/50 ) = .12.