Jen likes only chocolate and economics textbooks. Her demand functions for choco

Question

Jen likes only chocolate and economics textbooks. Her demand functions for chocolate and textbooks are
given by
Qc =m / (pc + pt)
Qt =m /(pc + pt)
where m denotes her income and pc and pt the price of chocolate and textbooks respectively.
a. Are chocolate and textbooks complements or substitutes for Jen?
b. Calculate the income elasticity for chocolate. Is chocolate a normal good?
2c. Assume we observe the following: Qt = 5; pc = 2; pt = 2.
If the price of textbooks doubles, by how much does the income have to increase to keep the textbook
consumption constant? What happens to chocolate consumption? Explain.

Explanation / Answer

a) Qc =m / (pc + pt) Qt =m /(pc + pt) chocolate and textbooks are complementary, because increase in price of chocolate will also reduce the demand of text books and increase in price of textbooks will decrease demand of chocolates. b) E = (% change in quantity demanded)/(% change in income) E= (dQ/dI)x(I/Q) for chocolate, dQ/dI = 1/(pc + pt) ; I/Q = (pc + pt) => E = 1 Yes, chocolate is a normal good , because demand increases when income increases. c) Qt = 5; pc = 2; pt = 2 m= 5 x 4 = 20 if pt = 4 m= 30 ; change in income =10 if pt increases and income remains same chocolate consumption will come down.

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