Suppose the demand function for a firm?s product is given by In Qxd = 7-1.5 In P

Question

Suppose the demand function for a firm?s product is given by In Qxd = 7-1.5 In Px + 2 In Py- 0.5 In M + In A where: P= $15 P=$6 M = $40,000, and A=$350 a. Determine the own price elasticity of demand, and state whether demand is elastic, inelastic, or unitary elastic. Own price elasticity: Demand s: (Click to select) b. Determine the cross-price elasticity of demand between good X and good Y, and state whether these two goods are substitutes or complements. Cross-price elasticity: These two goods are: (Click to select) c. Determine the income elasticity of demand, and state whether good X is a normal or inferior good. Income elasticity: Good X is: (Click to select) d. Determine the own advertising elasticity of demand.

Explanation / Answer

(a) The own price elasticity is the coefficient of In Px, which in our case is 1.5, this also shows that elasticity value is greater than one implying that the demand is elastic.

(b) The cross-price elasticity is the coecient of lnPy, which is 2. Since this number is positive, goods X and
Y are substitutes.

(c) The income elasticity the coecient of lnM, which is -0.5. Since this number is negative, good X is a inferior
good.

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