Actuarial Outpost C2 NOV 2000 #14
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#1
10-26-2002, 02:49 PM
 RiSK kid Member Join Date: Aug 2002 Location: University of Toronto Posts: 67
C2 NOV 2000 #14

You are given the function for engel's curve
: y= 2/3x-2 for x>3

X is income, Y is quantity.

Find income elasticity from 6 to 9?

I used the formula dX/dy *Y/X

For y and x why does the solution use the starting point x=6 and y =2?/
Why not the end points and why not the average??
Just curious and do we assume we always use the starting point.

In my Eco classes I have always been taught to use the average of the two points
using the formula (change in p/ave of p)/ (change in Q/ave of Q)

Thanks in advance for the help!!

Also, is it just me or are a lot of these quest ions on COURSE 2 poorly worded.
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#2
10-26-2002, 03:57 PM
 VernSchil Member Join Date: May 2002 Posts: 2,908

I'm fairly certain you always want to use the starting points for elasticites. Someone asked that question at my seminar in Atlanta, and Steven Kellison said to always use starting points, although he could not support that statement with any proof (he's a terrible teacher btw).
I just did the entire Nov 2000 exam, and I thought there were many questions on this exam in particular that were terribly worded.
#3
10-26-2002, 07:12 PM
 c3 taker Member Join Date: Aug 2002 Posts: 137
Re: C2 NOV 2000 #14

Quote:
 Originally Posted by RiSK kid You are given the function for engel's curve : y= 2/3x-2 for x>3 X is income, Y is quantity. Find income elasticity from 6 to 9? I used the formula dX/dy *Y/X For y and x why does the solution use the starting point x=6 and y =2?/ Why not the end points and why not the average?? Just curious and do we assume we always use the starting point. In my Eco classes I have always been taught to use the average of the two points using the formula (change in p/ave of p)/ (change in Q/ave of Q) Thanks in advance for the help!! Also, is it just me or are a lot of these quest ions on COURSE 2 poorly worded.
As you said the equation for income elasticity is

(change in Q)/(change in I) * (I/Q)

You plug in the initial values or I and Q because that is how Landsburg says to do it, therefore how it should be done to get a correct answer in course 2. May not be a good reason, but it's good enough for me

change in Q = 2
change in I = 3
initial Q = 2
initial I = 6

(2/3)*(6/2) = 2
#4
10-28-2002, 09:50 AM
 retaker Member Join Date: Aug 2002 Posts: 395

I think of the elasticity as a derivative (it is), instantaneous rate of change, and you take derivatives at points not between points, right?
#5
10-28-2002, 01:04 PM
 shluffer Member CAS Join Date: Aug 2002 Posts: 489

For this one I thought it was best to go basic and use:

(%change in Q)/(% change in I)

this way you don't have to wory about which endpoint to use.
#6
10-28-2002, 01:20 PM
 retaker Member Join Date: Aug 2002 Posts: 395

"Also, is it just me or are a lot of these quest ions on COURSE 2 poorly worded."

Are you trying to instigate me? I have already been harassed (sexually-not!) for pointing this out. However, if anyone would like to "harass" me, please PM.

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