The demand for Wanderlust Travel Services (X) is estimated to be Qx = 22,000 - 2.5Px + 4Py - 1M + 1.5Ax, where Ax represents the amount of advertising spent on X and the other variables have their usual interpretations. Suppose the price of good X is $450, good Y sells for $40, the company utilizes 3,000 units of advertising, and consumer income is $20,000.
a. Calculate the own price elasticity of demand at these values of prices, income, and advertising.
b. Is demand elastic, inelastic, or unitary elastic?
c. How does an increase in price affect revenues? Why?
d. How will your answers to parts a and b change if the price of Y increases to $50?
e. Is good X a normal good? Why/Why not?
f. Are goods X and Y substitutes? Why/Why not?