Suppose Product A has the demand function QA = 10 - 5PA + 2PB + 0.01I. The initial values of the variables are QA = 15, PA = $4, PB = $2.5 and I = $2,000.
a. When PA moves to $3.4, keeping other variables at their initial values, QA becomes 18. What is the corresponding own-price arc elasticity of demand?
b. If income, I, increases to $2,250 per period with all other variables held at their ini- tial values, QA becomes 17.5. What is the corresponding income arc elasticity of de- mand?
c. If PB increases to $3 with all other variables held at their initial values, QA becomes 16. What is the corresponding cross-price arc elasticity of demand?
d. Is Product A an inferior or normal good? Are Product A and Product B substitutes or complements? Explain.
e. Is the firm charging the revenue maximizing price for Product A at the initial values? Explain.
f. Compute the MR at the initial values.