1. Some of the results obtained by Robert Halvorsen when he applied statistical

Question

1. Some of the results obtained by Robert Halvorsen when he applied statistical methods to estimate demand elasticity for electricity are as follows: Own price elasticity of demand = 0.97 Income elasticity of demand = 0.71 Cross price elasticity of demand for electricity wrt changes in the price of natural gas = 0.16

a. If the price of natural gas were to decrease by 15% what would be the percentage change in the quantity demanded of electricity? [Hint: %Qdx= xy%Py]

b. If household income were to decrease by 5%, what would be the percentage change in the quantity demanded of electricity? [Hint: %QdX= M %M]

2. If the income elasticity of demand for wine is 1.4 predict the effect on quantity demanded, ceteris paribus, if average household income were to decrease by 3.5%.[Hint: %QdX= M %M]

Is wine a luxury or necessity?

3. If the cross price elasticity of demand for chicken with respect to changes in the price of pork is 0.29, predict the change in the quantity demanded of chicken if the price of pork decreases by 20%. [Hint: %Qdx= xy%Py]

Are the two products substitutes or complements?

Explanation / Answer

a. Natural gas and electricity here are substitute goods. A fall in the price of one would lead to decrease in the demand for another.

Given that cross price elasticity E = 0.16, price for natural gas = -15%.

Cross price elasticity = % change in quantity demanded of electricity/% change in price.of natural gas.

0.16 = %change in quantity demanded/-15%

0.16*(-15%) = % change in demand.

-2.4% = change in demand. That is the demand would fall by 2.4%.

b. Income elasticity = 0.71, fall in income = -5%

Income elasicity = % change in quantity demanded/% change in income.

0.71 = %change in demand/-5%

0.71*(-5%) = % change in demand.

-3.55% = change in demand. Thus the demand would fall as the income falls.

2. I = 1.4, fall in income = -3.5%

1.4 = % change in demand/-3.5%

1.4*(-3.5%) = change in demand

-4.9% = change in demand. Income reduced by lesser % than the decrease in demand, depicting that wine is necessity.

3. E = 0.29 fall in price of pork = -20%

0.29 = % change in demand/-20%

0.29*(-20%) = change in demand

-5.8% = change in demand.

As the price of pork falls, the demand for chicken also falls, depicting that pork and chicken are substitute goods.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.