Question

Assume Madjoko pharmacy has estimated demand for its flagship malaria drug MADJOTEM to be Q_M=250-4P_m+3.5P_c+0.4M-0.9MCE+0.50ADV
Where Qm is the quantity demanded of MADJOTEM, Pm is the price of MADJOTEM, Pc is the price of Coartem, M is income, MCE is malaria Control Education expenditure, and ADV is the advertising expenditure by Madjoko Pharmacy on MADJOTEM.
Explain the coefficients of the MCE, M and Pc, ADV and Pm in terms of demand for MADJOTEM.
Assume that Pm=GH₵9, Pc = GH₵10, , M= GH₵500, MCE= GH₵300 and ADV= 250. Calculate the current demand for MADJOTEM
compute the following price elasticities for MADJOTEM and explain thoroughly
Own price elasticity of demand
Cross elasticity of demand
Income elasticity of demand

I'm interested in the elasticity part

Answer 1

First , we fi d the equilibrium invome by substituting the values in the given equati9n which is as follows:

Q_m = 250 - 4P_M + 3.5P_C + 0.4M - 0.9MCE + 0.5ADV

Q_m = 250 - 4(9) + 3.5(10) - 0.4(500) - 0.9(300) + 0.5(250)

Q_m = 304

Own price elasticity:

E_{d =}

= (-4) × (9/304)

  Ed = -0.12

The own price elasricity measures the responsiveness of the change in the quantity demanded of the good to the change in the price of the good.

Cross price elasticity:

E_d =

= (3.5)×(10/304)

E_d = 0.12 = Cross price elasticity  

The cross price elasticity measures the responsiveness of the change in the quantity demanded of the good to the change in the price of the other good.

Income elasticity:

E_d =

= (0.4) × (500/304)

E_d  = 0.66

The income elasticity measures the responsiveness of the change in the quantity demanded of the good to the change in the income