Studiesindicate that the income elasticity of demand for servants

| November 24, 2016


a. Studiesindicate that the income elasticity of demand for servants in the United Statesexceeds 1. However, the number of servants has been decreasing during the last75 years, while incomes have risen significantly. How can these facts bereconciled?

b. Universityenrollments have increased substantially during the last recession. Onepossible explanation is that the cost of university education has decreased.However, this in fact is not true. Give two other possible explanations (withat least one of these explanations not relying on explicit costs andbenefits).


Assume that the demand for product A is QA= 500 –5 PA + 3 PB, and the demand for product B is QB=300 – 2 PB+ PA.

Currently, market prices and quantities for A and B are PA=5,PB=2, QA=481, and QB=301.

a. Suppose the price of Brises to 3. What happens to QB and QA? What is the priceelasticity of demand for product B?

b. Calculate thecross-elasticity of demand between A and B using PB= 2 and 3. Are Aand B complements or substitutes?


In the 1990s, the chicken market responded to two specific“shocks”:

– Many consumers became awareof the potential health problems associated with eating too much red meat.

– The technology in the feed,hatchery, and breeding stages of producing chickens improved.

a) Show and describe theeffect of these changes on the market for chicken. Clearly identify the new andold prices and quantities.

b) Can you use the (data on)prices and quantities identified in a) to estimate the demand equation forchicken? Can you use them to estimate the supply equation for chicken? Explain

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