Question #98245

a. The price of a cup of coffee was $0.29 in 1970 and $0.99 in 1993. The CPI was 38.8 in 1970 and 144.0 in 1993. Calculate the 1993 price of a cup of coffee in 1970 dollars.

b. For Chinese consumers, the income elasticity of demand for fruit juice is 1.1. If the economy enters a recession next year and consumer income declines by 2.5%, what is the expected change in the quantity of fruit juice demanded next year?

b. For Chinese consumers, the income elasticity of demand for fruit juice is 1.1. If the economy enters a recession next year and consumer income declines by 2.5%, what is the expected change in the quantity of fruit juice demanded next year?

Expert's answer

Solution:

a) Calculate the 1993 price of a cup of coffee in 1970 dollars

"p=\\frac{0.29\\times144}{0.99\\times33.8}=1.25"

Answer:1.25

b) The expected change in the quantity of fruit juice demanded next year is:

"\\varDelta Q=1.1\\times(-2.5)=-2.75"

Answer: Will decrease by 2.75%

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