You are the manager of Zokia Ghana Limited, a producer of beans. In Ghana, it is possible to produce
beans or groundnut using the same resources. Therefore, producers are able to sw itch from beans to groundnut production depending on market conditions. Consequently, Zokia consulted an Economist who estimated the demand function for beans as: Qbd = 600 – 4Pb – 0.03M – 12Pg + 15T + 6Pe + 1.5N
where Qbd is the quantity demanded of beans each month, ?? is the average
Ghana Cedis), M is the average household income (in GH¢), ?? is the price of groundnut (in GH¢), T is a consumer taste index ranging in value from 0 to 10 (the highest rating), ?? is the price (in GH¢) consumers expect to pay next month for beans, and N is the number of buyers in the market for beans. Assume the following initial values: ??=5, ??= 40, T= 6.5, Pe= 5.25, N= 2000, Qbd = 2479
Explain to your Board of Directors why management should be worried about a rise in the price of groundnut.
To analyse the impact of price of groundnuts on the demand of beans, we should know the cross-price elasticity of demand for beans with respect to groundnuts. Cross price elasticity of demand for any good is given by the % of change in the quantity of that good divided by the % change in prices of another related good. Thus, cross elasticity of demand for beans can be calculated as follows.
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