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Calculating and interpreting income elasticity of demand.

A steel industry trade group estimates that the demand for steel in a particular market is given as

Qs = 2,000 - 160Ps + 8I + 140Pa,

where Qs is the demand for steel (in pounds) per year, Ps is the price of steel in cents per pound, I is income per capita in dollars, and Pa is the price of aluminum in cents per pound. Currently the price of steel is 160¢ per pound, income per capita is $20,000, and the price of aluminum is 300¢ per pound.

What is the income elasticity? Interpret the elasticity in a mathematic and economic context. Illustrate what does this number tell you? Is the income elasticity consistent with economic principles? describe.

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M917834

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