Based on previous studies, you believe the linear demand function for your good

Question

Based on previous studies, you believe the linear demand function for your good is: QXd = 20,000 -10PX + 7PY + 3M + 2AX where PX is the price of X PY is the price of a related good Y M is the income of the buyers in the market and AX is advertising for X.

The good currently sells for $25, the related good sells for $40, the company is spending $50 on advertising, and average consumer income is $25,000. The marketing manager wants to know the own price elasticity and income elasticity for this good. Compute them.

Explanation / Answer

Calculate Qxd = 20000 - 250 + 280 + 75000 + 100 = 95130

Price elasticity = d(Qxd)/dPx x Px/Qxd = -10 x 25/95130 = 0.0026

Income elasticity = d(Qxd)/dM x M/Qxd= 3 x 25000/95130 = 0.7884

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