Question

The coconut oil demand function (Bushena and Perloff, 1991) is

                   Q = 1,200 – 9.5p + 16.2pp + 0.2Y

Where Q is the quantity of coconut oil demanded in thousands of metric tons per year, p is the price of coconut oil in cents per pound. Pp is the price of palm oil in cents per pound, and Y is the income of consumers. Assume that p is initially 45 cents per pound. Pp is 27 cents per pound, and Q is 1.375 thousand metric tons per year. Calculate the income elasticity of demand for coconut oil. The income elasticity of demand is

E = ____________ (Enter your response rounded to three decimal places)

Is coconut oil a normal good at that price and quantity combination?

Coconut oil is -------- good

Answer 1

the demand equation is given as:

Q=1200-9.5P+16.2Pp+0.2Y

we need to rewrite this in terms of Y

Y = 5Q-6000+47.5P-81Pp

Now we need to calculate the Income Y at the given values. so the Q has to be 1375 here.

Y=5*1375-6000+47.5*45-81*27

Y=825.5

the income elasticity of demand:

dQ/Dy = 0.2 Y=825.5 and Q=1375

IED = 0.120

as IED is between 0 and 1 it is a normal good.