Hints: -500 dp dQ The general linear demand for good X is estimated to be -1.5 Q = 250000 – 500p – 1.5M – 240p, dM dQ -240 where p is the price of good X, M is the average income of consumers dp, who buy good X, and p, is the price of related good r, The values of p, M, and p, are expected to be $400, $60,000, and $100, respectively. Use these values at this point on the demand to make the following computations. a Compute the quantity of good X demanded for the given values of P, M, and p. b. Calculate the price elasticity of demand ɛg. At this point on the demand for X, is demand elastic, inelastic, or unitary elastic? How would increasing the price of X affect total reveune? Explain. c. Calculate the income elasticy of demand Em. Is good X normal or inferior? Explain how a 4 percent increase in income would affect demand for X, all other factors affecting the demand for X remaining the same. d. Calculate the cross-price elasticity ɛg. Are the goods X and R substitutes or complements? Explain how a 5 percent decrease in the price of related good R would affect demand for X, all other factors affecting the demand for X remaining the same.

Hints: -500 dp dQ The general linear demand for good X is estimated to be -1.5 Q = 250000 – 500p – 1.5M – 240p, dM dQ -240 where p is the price of good X, M is the average income of consumers dp, who buy good X, and p, is the price of related good r, The values of p, M, and p, are expected to be $400, $60,000, and $100, respectively. Use these values at this point on the demand to make the following computations. a Compute the quantity of good X demanded for the given values of P, M, and p. b. Calculate the price elasticity of demand ɛg. At this point on the demand for X, is demand elastic, inelastic, or unitary elastic? How would increasing the price of X affect total reveune? Explain. c. Calculate the income elasticy of demand Em. Is good X normal or inferior? Explain how a 4 percent increase in income would affect demand for X, all other factors affecting the demand for X remaining the same. d. Calculate the cross-price elasticity ɛg. Are the goods X and R substitutes or complements? Explain how a 5 percent decrease in the price of related good R would affect demand for X, all other factors affecting the demand for X remaining the same.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter6: Elasticities

Section: Chapter Questions

Problem 5P

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