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Homework answers / question archive / Suppose the following information is true for country A: a
Suppose the following information is true for country A:
a. Average annual income : $6,500 per family
b. Average consumption of meat: 200 pounds
c. Estimated income elasticity of demand: 10
d. Average price per pound of meat: $1.00
e. Population composed of one million families
Let us assume that the government wants to provide adequate nutrition to the families so that each family is able to afford 250 pounds of meat per year. This can be done by transferring income to the families by the government.
By using the above information, compute the cost of this program.
Computation of Cost of Program:
Given,
Original consumption = 200 pounds
New consumption = 250 pounds
Change in consumption= 250-200 = 50 pounds
So,
% change in consumption = 50/200 *100 = 25%
Given,
Original Income = 6500
Income elasticity of demand = 10
Income Elasticity of demand = % change in consumption/ % change in Income
10 = 25% / % change in income
% change in income = 2.5%
Increase in Income required = 6500*2.50% = $162.50 per family
Number of families = 1000,000 families
So,
Cost of Program = 1000,000 *162.50 = $ 162,500,000
