solution

The coconut oil demand function (Buschena and Perloff, 1991) is

Q = 1,200 – 9.5p + 16.2pp + 0.2Y,

where Q is the quantity of coconut oil demanded in thousands of metric tons per year, p is the price of coconut oil in cents per pound, is the price of palm oil in cents per pound, and Y is the income of consumers. Assume that p is initially 45¢ per pound, p_p is 31_¢ per pound, and Q is 1,275 thousand metric tons per year. Calculate the income elasticity of demand for coconut oil. (If you do not have all the numbers necessary to calculate numerical answers, write your answers in terms of variables.)