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Homework answers / question archive / Calculate the price and cross-price elasticities of demand for coconut oil
Calculate the price and cross-price elasticities of demand for coconut oil. The coconut oil demand function is Q = 1200 - 9.5P + 16.2PP + 0.2Y, where Pp is the price of palm oil in cents per pound and Y is the income of consumers. Assume that P is initially 45 cents per pound, Pp is 31 cents per pound, and Q is 1275 thousand metric tons per year.
PED= (change in Quantity /change in Price) * (Price / Quantity)
But,
change in Quantity /change in Price = -9.5 (obtained by differentiating Q with respect to P in the equation Q = 1200 - 9.5P + 16.2PP + 0.2Y.
Price (P) = 45
Quantity (Q) = 1275
Hence, PED = (-9.5) * (45 / 1275) = -0.34
cross-price elasticity of demand (XED) = (change in Quantity /change in Pp) * (Pp / Quantity)
but,
change in Quantity /change in Pp = 16.2 (obtained by differentiating Q with respect to Pp in the equation Q = 1200 - 9.5P + 16.2PP + 0.2Y).
Pp = 34
Quantity (Q) = 1275
Hence, XED = 16.2 * (34/1275) = 0.91
