Managerial economics – Demand analysis

June 2008 exam – question 5

Using the estimated elasticities presented in the Table above:

1. Comment on the own price elasticities of the three goods, identifying for which goods demand is elastic and for which it is inelastic.
2. What is the effect of a change in the price of food on the consumption of wine and beer? What does this suggest about the relationship between food and the other commodities?
3. Suppose that butter and margarine have a cross elasticity of demand of 2 and that the price of butter rises from 80p per lb to 90p per lb. What would be the percentage change in the demand for margarine?