Problem 1. The demand for good X is estimated to be Qxd = 10,000 - 4PX + 5PY + 2M + AX where PX is the price of X, PY is the price of good Y, M is income, and AX is the amount of advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000 units.
a) Calculate the quantity demanded of good X.
b) Calculate the own price elasticity of demand for good X. Is demand for good X elastic or inelastic?
c) If the firm selling good X wants to increase total revenue, would you recommend lowering or increasing price? Explain your answer.
d) Calculate the cross-price elasticity between goods X and Y. Are the goods X and Y substitutes or complements?
e) Calculate the income elasticity of good X. Is good X normal or an inferior good?