The general linear demand for good X is estimated to be
Q= 250,000 – 500P – 1.50M – 240Pr
Where P is the price of good X, M is average income of consumers who buy good X, and Pr is the price of related good R. The values of P, M, and Pr are expected to be $200, $60,000 and $100, respectively. Use these values at this point on demand to make the following computations.
a. Compute the quantity of good X demanded for the given values of P, M, and Pr .
b. Calculate the price elasticity of demand Ep. At this point on the demand for X, is demand elastic, inelastic or unitary elastic? How would increasing the price of X affect total revenue? Explain.
c. Calculate the income of elasticity of demand Em . Is good X normal or inferior? Explain how a 4 percent increase in income would affect demand for X, all other factors affecting the demand for X remaining the same.
d. Calculate the cross-price elasticity Exr. Are the goods X and R substitutes or complements? Explain how a 5 percent decrease in the price of related good R would affect demand for X, all other factors affecting the demand for X remaining the same.