Question

#10) Assume that you have the following cross-price elasticities for a particular country:

Commodity	Cross Price Elasticity
Rice and Beans	(-0.35)
Rice and Wheat	0.40
Rice and Chicken	(-0.10)
Rice and Milk	(-0.05)
Rice and other goods	0

10.a) You are a planner for the country represented above and you want to raise the consumption of rice by 6% to improve the calorie intake of the population. The income elasticity of demand for rice is 0.4. Use the information above and the homogeneity condition to determine the necessary percentage change in the price of rice.

10.b) If rice consumption increases by 6%, what else besides the calories obtained from rice would you need to consider when assessing the impact on calorie consumption?

Answer 1

b) To assess the condition on calorie consumption, one needs to consider which goods are not consumed and those which will be consumed along with rice when consumption of rice increases. Negative cross price elasticity shows that the two goods are complimentary goods,while a positive cross price elasticity shows that the goods are substitutes goods. For instance, With increase in consumption of rice, price of rice falls. This causes consumption of other goods to remain unchanged, consumption of beans, chicken and milk would increase and consumption of wheat will decrease.

percentage increase in quantity of beans= 0.35 * 20 = 7%