Question 1: The demand curve for a product is given by Qdx =1,000 – 2pPx +.02Pz where Pz = $400.
A) What is the own price elasticity of demand Px = $154? Is demanded elastic or inelastic at this price? What would happen to the firm’s revenue if it decided to charge a price below $154?
B) What is the own price elasticity of demand Px = $354? Is demanded elastic or inelastic at this price? What would happen to the firm’s revenue if it decided to charge a price below $354?
C) What is the cross-price elasticity of demand between good X and good Z when Px = $154? Are goods X and Z substitutes or compliments?
Question 2: Suppose the demand function for a firm’s product is given by
In Qdx = 3 – 0.5 In Px - 2.5 In Py + In M + 2 In A
Where
Px = $10
Py = $4
M = $20,000, and
A = $250
A) Determine the own price elasticity of demand, and state whether demand is elastic, inelastic, or unitary elastic.
B) Determine the cross-price elasticity of demand between good X and good Y, and state whether these two are substitutes or complements.
C) Determine the income elasticity of demand, and state whether good X is a normal or inferior good.
D) Determine the own advertising elasticity of demand.