Problem: The demand for erasers (Q) is given as follows:
Q = 240 - 4Pe + 2M + 1Pb + 1A , where Pe is the price of erasers, M is the level of income, Pb is the price of another (related) good, A is the level of advertising. Suppose that Pe = 10, Pb = 10, A = 10, and M = 20.
Q1. What is the price elasticity of demand of erasers?
Q2. Suppose that the price should increase slightly from $10, how will this affect the revenue of the firm selling the product? Explain without calculating total revenue at different prices.
Q3. What is the income elasticity of demand for erasers?
Q4. What is the cross price elasticity of erasers and product b (the other product)?