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 2 percent each year, by what percentage does the quantity demanded of wheat increase each year, holding all other factors constant? Instructions: Round your answer to 1 decimal place. Holding all other factors constant, if 10 billion bushels are demanded this year, by how many bushels will the quantity demanded increase next year if incomes rise by 2 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? percent.

Explanation / Answer

Income elasticity = % Change in quantity demanded / % Change in income

(a)

0.2 = % Change in quantity demanded / 2

% Change in quantity demanded = 2 x 0.2 = 0.4

Quantity increases by 0.4%.

Increase in number of bushels = 10 billion x 0.4% = 0.04 billion = 40 million

(b)

Increase in income every 30 years = 100%

0.2 = % Change in quantity demanded / 100

% Change in quantity demanded = 0.2 x 100 = 20%

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