Download Lab Exercise

Ag Ec 2183: The Agricultural Marketing System
Fall 2008
Professor Artz
In-lab exercise – Elasticity of demand and budget shares (25 points)
September 18/19, 2008
In-lab problems
1.
a. The price elasticity of rice in the US is estimated at -0.55. If the price increases 10%, how
would you expect quantity sold to change? Is demand for rice elastic or inelastic?
b. The cross price elasticity of rice and chicken is -0.33. Are chicken and rice substitutes or
complements?
c. The cross price elasticity of rice and potatoes is 0.018. Are rice and potatoes substitutes or
complements?
2. In a recent opinion piece in the The Economist magazine, the author writes, “Higher incomes in India
and China have made hundreds of millions of people rich enough to afford meat and other foods. In 1985
the average Chinese consumer ate 20kg (44lb) of meat a year; now he eats more than 50kg. China’s
appetite for meat may be nearing satiation, but other countries are following behind: in developing
countries as a whole, consumption of cereals has been flat since 1980, but demand for meat has doubled.”
Based on this passage, what can you infer about the income elasticity for meat relative to that for grain?
3. Recently a number of food processing companies have introduced several new kinds of frozen potato
products in retail food outlets. How is this likely to affect the price elasticity of demand for frozen French
fries in retail food stores? Briefly explain the logic of your answer.
4. If the price elasticity of demand for sweet corn from your roadside stand is -2.5, would you want to
raise or lower the price you are charging in order to increase total revenue? Explain.
5. The attached spreadsheet contains data from the Bureau of Labor Statistics’ Consumer Expenditure
Survey, 2006. (http://www.bls.gov/cex).
a. Calculate Income After Taxes minus Expenditures for each household income group in row
15. (Hint: enter the formula “=B10-B13” in B15 and drag across to copy)
b. Calculate the share of income after taxes spent on food, gasoline, apparel and entertainment for
each household income group in rows 24 through 27.
i. Hint: Use an absolute reference. An absolute reference in an Excel formula is denoted
by $. In this example, income after taxes data are in row 10. If I calculate the share of
food expenditures in row 24 as (=B18/B10) and then drag this formula down to copy
into row 25 to calculate the share for gasoline, the formula will change as follows:
“=B19/B11”. The B19 reference is correct (it refers to the cell with the annual
expenditures for gasoline) but the B11 is not correct (now instead of dividing by
income, you are dividing by age!). To prevent this, you should enter the formula
=(B18/B$10) in B24. Then when you drag the formula down, it will always refer to
row 10 in the denominator. Also, don’t use $B$10 – because if you drag the formula to
the right to calculate shares for the other income groups, it will always divide by the
income for the all households. (although, there may be other times when this is
exactly what you want to do).
c. Graph the expenditure shares by household income group in a stacked column chart.
i. Steps: Highlight the data for expenditure shares (A24:N27). Insert a column chart –
choose 2-D column and stacked column (the middle one).
ii. Add the horizontal axis labels, axis titles, and chart title.
d. Calculate the expenditure on food that would result from a 10% increase in food prices,
assuming NO adjustment in quantity (i.e., demand is completely inelastic or ε = 0)
i. Hint multiply the expenditures by 1.10 (Be sure you understand this!)
e. Calculate the expenditure on gasoline that would result from a 100% increase in gasoline
prices, assuming NO adjustment in quantity (i.e., demand is completely inelastic or ε = 0)
Written Response (in a Word document)
Compare the data for very low income households with very high income households. Which
households are more likely to change their consumption patterns in response to increasing food
and gasoline prices? Explain why. How would you expect these households to respond to
increasing prices?
Drawing on the data and your calculations, explain why demand for gasoline and food is more
elastic for low income consumers than for high income consumers. How can you reconcile this
with the fact that demand for both food and gasoline are very inelastic?
Include the graph you made in your response. Be sure to include the source of the data. Use a
professional style (no first person, please!).
Submit only your response to question 5 in a Word document to receive credit for this lab. Please
name your files LastName_FirstInitial_Lab3 and submit it through the Blackboard assignment link
for Lab 3.