8 In a study published in 1980 BB Gibson estimated the follo

8. In a study published in 1980, B.B. Gibson estimated the following price and income elasticities of demand for six types of public goods. Income Elasticity .36 .67 .88 1.25 1.09 Price Elasticity State Activity Aid to the poor Pollution control College and universities Elementary school aid Parks & recreation areas1.18 “.73 -.95 1.36 Do these publie goods conform to the law of demand? Which goods are elastic? Explain a. b. Which goods are normal goods and which are inferior? Explain. c. If the price of education increase by 10% and incomes increased by 8% what would be the change in demand for college and university education? Explain

Solution

State Activity

Price Elasticity

Income Elasticity

Aid to the poor

-.73

.36

Pollution control

-.95

.67

College and Universities

-.77

.88

Elementary school aid

-1.36

1.25

Park and recreation area

-1.18

1.09

a. Do these public goods are conform to the law of demand? Which goods are elastic? Explain.

Yes. All these goods are conforming to the law of demand. The price elasticity in all these cases is negative means they are conforming the law of demand. The price elasticity always negative because of the inverse relationship between price and quantity demanded. All these goods are elastic. However, elementary school aid and park and recreation area is relatively elastic and remaining is relatively inelastic. Relatively elastic is always greater than one and relatively inelastic is less than one.

b. Which goods are normal goods and which are inferior?

It seems all the goods are normal goods. In case of inferior goods the income elasticity will be negative. But here the income elasticity for all these activities is positive. Hence, must be normal goods.

c. If price of the education increases by 10% and income increases by 8% what would be the change in demand for college and university Education.

The quantity demanded of colleges and university will fall. The change in the price is more than the income of the consumers. Hence, the quantity demanded will fall.

State Activity	Price Elasticity	Income Elasticity
Aid to the poor	-.73	.36
Pollution control	-.95	.67
College and Universities	-.77	.88
Elementary school aid	-1.36	1.25
Park and recreation area	-1.18	1.09