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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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 Fall '07
 McDevitt
 Economics

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