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PS5Answers - UCLA Economics 11 Fall 2009 Professor Mazzocco...

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UCLA Economics 11 – Fall 2009 Professor Mazzocco Problem Set 5 1). A recent study estimated the demand for coffee as follows: C=I 0.45 P T 0.21 /(2+P C ), where C is the quantity of coffee demanded, I is income, P T is the price of tea, and P C is the price of coffee. Suppose that income is 30000, P T is 0.80, and P C is 1.20. a) Find the income elasticity for the demand for coffee. Is coffee an inferior or normal good? Do the results indicate that coffee is a necessity or a luxury? b) Find the own elasticity of demand for coffee. Is the demand for coffee elastic or inelastic at this price and income level? Discuss how the price elasticity varies with P C and income. c) Are coffee and tea gross substitutes or gross complements? d) Can you say whether coffee and tea are net substitutes or net complements using the information given in the exercise? Answer: a) Should show work for credit. The easiest approach is to take the log of both sides of the demand equation: ln C = 0.45 ln(I)+0.21 ln(PT)-ln(2+PC). Then, the income elasticity of supply
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PS5Answers - UCLA Economics 11 Fall 2009 Professor Mazzocco...

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