Nadia consumes two goods, food and clothing. The price of food is $2, the price of clothing is $5, and her income is $1,000 . Nadia always spends 40 percent of her income on food regardless of the price of food, the price of clothing, or her income
a. What is her price elasticity of demand for food?
b. What is her cross-price elasticity of demand for food with respect to the price of clothing?
c. What is her income elasticity of demand for food?
a. Nadia's expenditure on food does not change when the price of food changes. This means that her demand for food must be unit elastic.
b. Her expenditure on food does not change when the price of clothing changes. Since the price of food is unchanged, this must mean that her demand for food must not change when the price of clothing changes. Therefore her cross price elasticity of demand for food with respect to the price of clothing must be zero.
c. Initially, Nadia's expenditure on food is 40% x $1,000 = $400 . Since the price of food is $2, this means that she initially consumes 200 units of food. Now suppose her income rises by 100 percent (i.e., her income doubles). If she continues to spend 40 percent of her income on food this must mean her expenditure rises to $800 and her consumption of food rises to 400 units (since the price of food remains constant at $2). So Nadia's demand for food has doubled when her income doubled, and therefore her income elasticity of demand for food must equal 1 .
You might also like to view...
When the Fed supplies the banking system with an extra dollar of reserves, deposits increase by more than one dollar—a process called
A) extra deposit creation. B) multiple deposit creation. C) expansionary deposit creation. D) stimulative deposit creation.
In the Stackelberg model, there is an advantage
A) to waiting until your competitor has committed herself to a particular output level before deciding on your output level. B) to being the first competitor to commit to an output level. C) to the firm with a dominant strategy. D) to producing an output level which is identical to a monopolist's output level.
Mary purchased a stuffed animal toy for $5. After a few weeks, someone offered her $100 for the toy. Mary refused. One can conclude that Mary's consumer surplus from the toy is
A) less than $5. B) at least $95. C) at least $100. D) $105.
Refer to Table 2-17. Which of the following statements is true?
A) Lucy has a comparative advantage in making both products. B) James has a comparative advantage in making both products. C) Lucy has a comparative advantage in making tricycles and James in making wagons. D) Lucy has a comparative advantage in making wagons and James in making tricycles.