Are rye bread and wheat bread substitute or complements/ Econometrics
Let the market demand for rye bread be given by Q = 500 I – 250Prye 400Pwheat, where Q is monthly demand in number of loaves, I is average monthly income in dollars, Prye is the price of a loaf of rye bread, and Pwheat is the price of a loaf of wheat bread. If I = $1,000, Prye = $2, and Pwheat = $3, calculate the following (based on 10% changes in denominators):
(a) the arc price elasticity of demand for rye bread ?
(Hint: assume 10% change makes the price of rye bread rise from $2 to $2.2. Plug $2.2 into equation, you will get Q2)
(b) the arc cross-price elasticity of demand for rye bread Erw;
(Hint: now assume 10% change makes the price of wheat bread rise from $3 to $3.3)
(c) From part (b), are rye bread and wheat bread substitute or complements?
