Question

1. Suppose that the daily income of Mundungundunguzika rises from K50 to K100. As a result of the increase, his purchases of bread increases from 2 loaves per day to 3 loaves per day. What is his income elasticity of demand for bread? [3 Marks]
2. Suppose now that Mundungundunguzika faces the following demand function

Where Y is his income, Q is the quantity of Bread purchases and P is the price of bread per loaf.

1. When Price is K150 and income is K15,000, determine the following:

1. Price elasticity of demand [2 Marks]
2. Income elasticity of demand [2 Marks]

2. Determine what effect a rise in price would have on total revenue. [1 Mark]
3. Assess how sales of bread would change during a period of rising incomes               [2 Marks]

Answer 1

Now, the income increasis from a encome increasybrom k50 to kloo. pm clase of bread is ceases from 2 loaus Pu and day to 3 loaves pn day. bluce here, initial income mi = kso - Final income M2 = k100 Inidial quality de raded Q, = 2 loaun final quantity demanded Q2 = a loans Now, Prentage Chaqe in ! quantity demanded demand (Q2-Q4) x 100 Yaztav . (Qatau x loo X 100 . (3-2) -X10 - E 1372 · 407 40% and pucentage Change in income :- (100-so) x100 T100750) (M2-mi) x100= 1M2tmi) 2 - 66.67.60 I Now, in come z elasticity demand for bread percentage change in quantity demanded Incentage change in income 1.7 66.67 4o - cs Scanned with CamScanner

i suppose how that mundug unduguzika faces the following demand function ro=(5 4000 + 30y-29 ) 4000 H307-2Q 2) P = 4 od +30y -20 TIP = 4oo +307- 20 SIP - 4000 - 30y =-2Q ) 29 2 - 11p+ 4 000 +30y =) Q - - S.SP + 2000 + 15 y Hue, y= in come Q = Quantity of bread pucluse. 1. P = pace of bread Pu load. a Now Price elasticity of demands E ? da. Now hue Q = - Sosp tu - 5.5 p t 2000 + 15 y - andQ = -5.5 when price = k150 and come mek 15,680 than, Quantity Q =(-5.5 * 150) +2.000 HIS * 1960) =) Q = 226175 I Now substituting sa = -sis P= 150 and [cs ScannQ 2 226 175 in E we get, CamScanner

&= -5.5A 1150 226175 = -0.0036 the absolate value of elasticity -0.004 lel=0.004 ay Now Q = -5.50 +2000 tisy Now O Q = 15 Now in core elasticity of demand Em=2a z Now substituting 20 =15, y = k 15,000 and Q = 226175 in Em we gets Em - 15 * ( 1500 ) 3 0.9 226175 1 e) As absolate value of price elasticity lel=0.004 Which is less than 1, hence demand is in elastic. In ease of in elastic demand , 1% rise in Price would cause a decline in quantity demanded by less than 1% . Hace total reueme = (Price X quantity ) will innease as in hease in pace will outweigh the decline in quantity . es Now as Em or in come elasticity of demand is - positive, hence an increase in income would raise the sale of bread. Hace sales of bread will increase diningred period of rising in come. C duncan Scanner