2009PS 7 Solutions - AEM 4150 Price Analysis Fall Semester...

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Price Analysis Fall Semester 2009 Homework Assignment 7 Suggested Solutions Question 1 (a) ( 29 ( 29 2 2 2 1 1 1 2 2 1 1 1 1 w P E w P E w P w P E x + + = commodity basic wrt the 2 product joint of yield fixed w commodity basic wrt the 1 product joint of yield fixed w product2 joint elasticity E 1 product joint elasticity E 2 product joint price P 1 product joint price P 2 1 2 1 2 1 The formula assumes that joint products are obtained in fixed proportions from the basic commodity. Hence, w 1 and w 2 are fixed. (b) In our example, we have 85 . 0 50 10 18 5 . 1 1 50 30 12 7 . 0 1 50 10 18 50 30 12 - = - + - + = x E Problem 2 (a) The formula for cross price elasticity is i j j i ij Q P dP dQ E = Recall that if goods are complements, cross-price elasticity will be negative. For example, if the price of gasoline rises, the sales of large cars will decline. On the other
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2009PS 7 Solutions - AEM 4150 Price Analysis Fall Semester...

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