2. The price elasticity for rice is estimated to be -0.4 and the income elasticity is 0.8. At a price of $0.40 per pound and a per capita income of $20,000, the demand for rice is 50 million tons per year.
a. Is rice an inferior good, a necessity or a luxury? Explain.
b. If per capita income increases to $20,500 approximately what will be the quantity demanded of rice? (hint: consider the income change as being very small).
c. If the price of rice increases to $0.41 per pound, and per capita income is initially $20,000, about how much must per capita income change for the quantity demanded to remain at 50 million tons per year? (hint: consider the price change as being very small).
Answer (a): Rice is a necessity. This is because the demand of rice is inelastic with respect to income. If it was a luxury item then the demand will be highly elastic and if rice ...
The solution explains the price elasticity of demand concept using the scenario provided.