June 2008 exam – question 5

Using the estimated elasticities presented in the Table above:

Comment on the own price elasticities of the three goods, identifying for which goods demand is elastic and for which it is inelastic.
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?
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?

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Comment 2 @ 2008-09-01 12:00

-0.25 is the change of demand of food, if the price food increases by 1% there is a -0.25 change. For the 1% increase of food the demand of wine decreases by 0.13%. The 1% increase of food causes an increase in the demand of beer by 0.07%

Comment 1 @ 2008-09-01 11:43

HOPE YOU FIND THESE COMMENTS USEFUL:
GUIDANCE ON THE QUESTION
In a response to a 1% price change there is a negative .25% drop in price. Now they are asking u to comment on this.
Make sure u can read the table.
What is - 0.13 for wine? It is the quantity demanded.