Author Question: Sylvia allocates her monthly income between Food and Housing. Her budget share spent on food in a ... (Read 261 times)

sam.t96 · **on:** Jul 1, 2018

Sylvia allocates her monthly income between Food and Housing. Her budget share spent on food in a given month is always 30, and for Sylvia, food is a necessity (income elasticity between zero and one).

Derive the maximum and minimum values for the income elasticity of demand for housing.

Question 2

A market is in equilibrium when

A) supply is equal to demand.
B) the price is adjusting upward.
C) the quantity supplied is equal to the quantity demanded.
D) tastes and preference remain constant.

macybarnes · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

The weighted (by budget share) sum of income elasticities will sum to one. Thus to derive bounds for income elasticity of housing, we use the following equation:
.3F + .7H = 1
Rearrange this equation:
H = (1 - .3F)/.7
We are told that food is a necessity (0 < F < 1 ) which tells us the range of H:
minimum H = 1
maximum H = 1.43

Answer to Question 2

C