The demand function for Product X is given by: = 800- 2Px- 0.05Px -0.2Py + 4Pz + 0.

01I+ 2A

Where Px Price of good X Py Price of related good y Pz Price of related good z I A Income Advertising $7000.00 $250.00 $40.00 $100.00 $120.00

a. (i) Calculate the own Price elasticity of demand (PED) for Good X.

-2(120)-0.05(14400)-0.2(100)+4(40)+0.01(7000)+2(250)

=550 The quantity demanded is equal to 550 which was found using the demand function above. Now the function must be differentiated to find out how much quantity demanded would change with respect to the price of good X: Q/P * P/Q Lets find Q/P Q= 800- 2P-0.05 Q/P= -2 0.1 P If P = 120 then,

Q/P= -2 0.1 P = -2 -0.1 (120) = -14 All the elements of the formula is present so now the elasticity could be found: Q/P * P/Q -14* 120/550 The price elasticity for good X when price is $120 is equal to -3.05 Absolute value= 3.05 ( elastic)

(ii) Discuss whether revenue can be increased by increasing the price of Good X? The Percentage change in price is less than percentage change in quantity demanded. As price increases the revenue earned will decrease because the demand for the good will decrease. Buyers of that product will find a substitute for the product simply because the consumer does not want to spend to much of their income on a product that has been increased when they can get the same benefits of a similar product at a much cheaper price. Therefore the supplier who increases his price will get a decreased revenue. This is also influence by the buyers income and willingness to spend.

(iii) Illustrate on a well labelled demand graph for Product X, the Total Revenue earned when Price is equal to $120.00. Using the formula for total revenue= Price * Quantity Where Price = $120, and Quantity demanded as found in a(1) = 550 From the graph below it is seen that price=$120 and quantity demanded =550 therefore total revenue earned; Total revenue is therefore equal to 120* 550 = $66000

Demand Graph Showing Quantity plotted Against Price

Price

Price Elasticity of Demand = -3.05

120

Point; P= $120, Q=550

550

Quantity

b. (i) Determine the Cross-Price elasticity of demand (XED) between Good X and Good Y.

Cross Price Elasticity of Demand = % change in quantity demanded for one good/ % change in price of a related good

; Good Y increased from $100 to $140 Therefore the new demand function will read -2(120)-0.05(14400)-0.2(140)+4(40)+0.01(7000)+2(250)

Using the Cross Price Elasticity Formula above: (542-550/550*100) / (140- 100/100 *100) = -1.45/ 40 = -0.04

(ii) Using your answer for b. (i), explain the relationship between Good X and Good Y. (Substitute, Complement etc) From the answer above, it can be said that Goods X and Y are compliments of each other. They are compliments because the Cross price elasticity was a negative value i.e. -0.04

(iii) Determine the Cross-Price elasticity of demand (XED) between Good X and Good Z.

= 800- 2Px- 0.05Px -0.2Py + 4Pz + 0.01I+ 2A ; Pz= $40, , P= $120, Therefore when Pz = $50 -2(120)-0.05(14400)-0.2(140)+4(50)+0.01(7000)+2(250)

When Pz = $40 ,

and , when Pz = $50 ,

Therefore cross elasticity of demand = (590-550/550*100) /(50-40/40*100) =727/25 =0.29 Cross Elasticity of Demand between Goods X and Z = 0.29

(iv) Using your answer for b. (iii), explain the relationship between Good X and Good Z (Substitute, Complement etc)

From the above answer it can be said that goods X and Z are substitutes because the cross price elasticity was a positive figure i.e. 0.29

(v) Based on the solutions for parts b. (i) to (iv) above, suggest one example of an actual agricultural product that fits the description for each of the following: Product X, Product Y and Product Z.

Good X is Wheat and Good Y is Flour. These two are compliments to one another. Furthermore if there is an increase in price for Wheat, the price of flour will increase and the quantity demanded will decrease, therefor from the function it can be said that Good Z could be a substitute for good X and an example for this will be rice because both are staple foods.

c. Consider the following two situations:

Both situations highlighted above, will affect the Total Revenue earned by Producers of Good X. Explain which situation is more beneficial, to the producers of Good X, from a Total Revenue earned perspective.

Situation 1; A 15% increase; 0.29*(15/100)= 0.0435 = 0.0435*550 Quantity = 23.93

Therefore Total revenue= Price *Quantity =23.93 * 40 =$957.2 is the total revenue for good Z

Situation 2; A 60% decrease ; -0.04*-60%=0.024 Quantity =0.024*550= 13.2 Therefore Total Revenue= 13.2*100 =$1320 is the total revenue for good Y

Situation 2 will be more beneficial to the producers of good X because as we can see the total revenue earned for situation 2 which is Y was $1320 as opposed to situation 1 which the total revenue earned was $957.2. As there was a 60% decrease in the price of good Y, there was a greater quantity demanded so therefore a greater overall revenue compared to good Z. Simply put more buyers will be attracted to the cheaper good than the expensive.

d. (i) Calculate the Income elasticity of demand (YED) for Good X

= 800- 2Px- 0.05Px -0.2Py + 4Pz + 0.01I+ 2A -2(120)-0.05(14400)-0.2(140)+4(50)+0.01(8000)+2(250)

= % change in quantity demanded/ % change in income= (YED)

Therefore; (560-550/550*100)/(8000-7000/7000*100) =1.82/14.30 =0.13

(ii) Explain whether Good X is a normal good or an inferior good.

Income elasticity of demand for good X=0.13. Since this is a positive value, good Y is a normal good.

e. Assume that the own Price elasticity of demand (PED) for Good X is -2 and the Income elasticity of Demand (YED) for Good X is 3.

(i) Calculate the percentage change in consumption that will occur, when income declines by twenty percent (20%) .

Income Elasticity declines by 20% then YED= % change of demand/ -20% (a minus is used because it is a decline) = 3 YED= 3 Therefore % change in demand= -20%*3= -60% So when income declines by 20% the % change in consumption is decreased by 60%

(ii) Using the demand function presented for Good X above, determine the new quantity of Good X demanded when income declines by twenty percent (20%) , and the Income Elasticity of Demand (YED) for Good X is 3

Income =$7000 -2(120)-0.05(14400)-0.2(140)+4(50)+0.01(7000)+2(250) When income =$7000 the quantity demanded= 536 Therefore the quantity demanded of good X demanded when income declines by 20% is 536.

f. Suppose that the Cross-price elasticity of demand (XED) between Good X and Good Z is 4. (i) How much would the price of Good Z (Pz) have to change in order to increase the consumption of Good X by twenty five percent (25%)?

If n*2 (XED)= 4 and % change in X demanded=25% Then XED= 25%/ % change in price of good Z=4 Therefore price of good Z would have to change 25%/4= 6.25% Price of good Z would have to increase by 6.25% in order to increase the consumption of good X by 25%. (ii) Use a well-labeled illustration of the demand curve for Good X to show the effect on the demand for Good X, of the change in the Price of Good Z (Pz) as calculated in f. (i)above.

Demand Curve showing the effect on demand for good X, of the change in the price of good Z

Price of good X

Quantity of good X Demanded The graph illustrates rise in price of product X substitutes to shift the demand curve for product X to the right, hence more of product X will be purchased at each price, therefore the quantity demanded will increase.