4. Suppose the own price elasticity of demand for good X is -2, its income elast

Question

4. Suppose the own price elasticity of demand for good X is -2, its income elasticity is 3, its advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is -6. Determine how much the consumption of this good will change if:
a. The price of good X increases by 5 percent.
b. The price of good Y increases by 10 percent.
c. Advertising decreases by 2 percent.
d. Income falls by 3 percent.



15. You are division manager at Toyota. If your marketing department estimates that the semiannual demand for the Highlander is Q = 100,000 – 1.25P, what price should you charge in order to maximizes revenues from sales of the Highlander?

Explanation / Answer

4. For notation "%d" means "percent change." a. E(demand) = -2 = %dQ/%dP -2 = %dQ/5 %dQ = -10 The quantity decreases by 10% b. E(cross) = -6 = %dQ/%dPy -6 = %dQ/10 %dQ = -60 The quantity decreases by 60% c. E(advertising) = 4 = %dQ/%dA 4 = %dQ/-2 %dQ = -8 The quantity decreases by 8% d. E(Income) = 3 = %dQ/%dI 3 = %dQ/-3 %dQ = -9 Quantity falls by 9% 15. Q = 100,000 – 1.25P R = P*Q R = P*(100,000 – 1.25P) Take the derivative with respect to P and set equal to zero to maximize. MR = 1000000 - 2.5P = 0 1000000 = 2.5P P = 1000000/2.5 P = 400000

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