Answered

Explore Westonci.ca, the premier Q&A site that helps you find precise answers to your questions, no matter the topic. Get detailed answers to your questions from a community of experts dedicated to providing accurate information. Get detailed and accurate answers to your questions from a dedicated community of experts on our Q&A platform.

An individual has the following demand function for gasoline:

QDGAS = 15-3PriceGAS + 0.02Income + 0.11PriceBT - 0.008PriceAUTO

Where income and car price are measured in thousands, and the price of bus travel is measured in average dollars per 100 miles traveled. Assuming the average automobile price is $22,000, income is $40,000, the price of bus travel is $25, and the price of gasoline is $30, calculate and interpret the income elasticity of gasoline demand and the cross price elasticity of gasoline demand with respect to the price of bus travel.

Sagot :

ajeigbeibraheem

Answer:

Explanation:

From the information given:

[tex]Q^d_{gas} = 15 - 3 P_{gas} + 0.02 I +0.11 P_{BT} -0.008P_{AUTO}[/tex]

[tex]Q^d_{gas} = 15 - 3 (30) + 0.02(40000) +0.11 (25) -0.008(22000)[/tex]

[tex]Q^d_{gas} = 15 - 90 + 800+2.75 -176[/tex]

[tex]Q^d_{gas} = 551.75[/tex]

So, Income elasticity = [tex]\dfrac{dQ^d}{dI}*\dfrac{I}{Q^d}[/tex]

[tex]= 0.02 *\dfrac{40000}{551.75}[/tex]

= 1.45 which is greater than 1

It is positive → i.e. Normal good

The cross elasticity = [tex]\dfrac{dQ^d}{dPBT}*\dfrac{PBT}{Q^d}[/tex]

[tex]= 0.11 \times \dfrac{25}{551.75}[/tex]

= 0.0049 which is greater than 0

It is positive →  hence they are substituents.

We appreciate your time. Please revisit us for more reliable answers to any questions you may have. We hope this was helpful. Please come back whenever you need more information or answers to your queries. Find reliable answers at Westonci.ca. Visit us again for the latest updates and expert advice.