Demand for bicycles in the Netherlands is given by Q = 2, 000 + 15Y 5.5P where Y

Question

Demand for bicycles in the Netherlands is given by Q = 2, 000 + 15Y 5.5P where Y is income in thousands of euros, Q is the quantity demanded of bicycles, and P is the price per unit in euros. When P = 150 and Y = 15 (i.e., 15,000 euros), find (a) Price elasticity of demand (b) Income elasticity of demand Describe the demand for bicycles in Holland based on your answers above. Is demand elastic? Are bicycles a normal or an inferior good? Luxury or a necessity? How do you think this may compare to demand for bicycles in the US?

Explanation / Answer

Answer:

given that

Q = 2,000 +15Y - 5.5P

When P = 150 and Y = 15,

Q = 2,000 + (15 x 15) - (5.5 x 150)

= 2,000 + 225 - 825

= 1,400

(a) Price elasticity of demand = (dQ / dP) x (P / Q)

= - 5.5 x (150 / 1,400)

= - 0.59

(b) Income elasticity of demand = (dQ / dY) x (Y / Q)

= 15 x (15 / 1,400)

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