An extension of the differential demand system model is developed that allows the demand systemâs income and price responses to vary with income level. The modelâs income flexibility and marginal propensities to consume (MPCs) out of income are made functions of real income measured by the Divisia volume index. The income flexibility is a factor of proportionality underlying all price effects and a change in this term impacts the sensitivity of all demands to prices. Price effects are also made a function of the MPCs using a uniform substitute specification. The model was used to analyze the conditional demands for a group of beverages. The findings indicate that changes in conditional total beverage expenditures result in various income and price elasticity changes across individual beverage products.
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Paper provided by Florida Department of Citrus in its series Research Papers 2006 with number
36836.