he monthly demand for trotro rides in Kumasi, Ashanti depends on the price of a taxi ride, the price of a trotro ride, and the average monthly income of riders. Some consumers might choose to ride the taxi instead of the trotro, while other riders might use both forms of transportation to get to their final destination. The demand function for trotro rides is: Qd = 9,750 – 500P + 250Pj + 5INCOME, where Qd is the number of trotro rides demanded per month, P is the price of a ride, Pj is the price of a taxi ride, and INCOME is the average monthly income of riders. Suppose that P = $1.50, Pj = $4, and INCOME = $3,000. What is the monthly quantity of trotro rides demanded? What is the value of the cross-price elasticity of demand? Based on your answer, are taxi rides and trotro rides substitutes or complements? What is the value of the income elasticity of demand? Based on your answer, are taxi rides an inferior or a normal good?
. The monthly
Qd = 9,750 – 500P + 250Pj + 5INCOME,
where Qd is the number of trotro rides demanded per month, P is the price of a ride, Pj is the price of a taxi ride, and INCOME is the average monthly income of riders.
Suppose that P = $1.50, Pj = $4, and INCOME = $3,000.
- What is the monthly quantity of trotro rides demanded?
- What is the value of the cross-price elasticity of demand? Based on your answer, are taxi rides and trotro rides substitutes or complements?
- What is the value of the income elasticity of demand? Based on your answer, are taxi rides an inferior or a normal good?
Elasticity of demand measures the responsiveness of percentage change in quantity demanded due to some percentage change in price of the good.
Cross elasticity of demand measures the responsiveness of percentage change in demand due to some percentage change in price of related goods. The related goods are classified as substitutes and complements.
Cross elasticity of demand measures the responsiveness of percentage change in demand due to some percentage change in income of consumer. Based on change in demand due to change in income, goods are classified as normal and inferior.
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