The price elasticity for rice is estimated to be – 0.4 and the income elasticity is 0.8. At a price of $0.40 per pound and a per capita income of $20,000, the demand for rice is 50 million tons per year.
a. Is rice an inferior good, a necessity, or a luxury? Explain.
b. If per capita income increases to $20,500, what will be the quantity demanded of rice? (Hint: Apply the income elasticity to the percentage change in income. Then, apply this result to the original demand.)