Question

Given the demand equation for good X given by: Q_d= 1000 -50Px + 20Py +.5M. Suppose Px=10, Py=25, and M=1000. A) Find the own price elasticity of demand, the cross price elasticity of demand, and the income elasticity of demand

Answer 1

Given the demand equation for good X

Q_d= 1000 -50Px + 20Py +.5M

Putting ,

Px=10, Py=25, and M=1000 in the above equation we get,

Q_d= 1000 -50*10+ 20*25 +.5*1000

=1500

For own price elasticity we need to calculate,

(dQ/dPx )*(P/Q) = -50*(10/1500)

=-0.33

• Answer: The own price elasticity of demand is -0.33

For cross price elasticity we need to calculate,

(dQ/dPy)*(Py/Q)= 20*(25/1500)

=0.33

• Answer: The cross price elasticity of demand is 0.33

For income elasticity of demand we need to calculate,

(dQ/dM)*(M/Q)= 0.5*(1000/1500)

= 0.33

• Answer: The income elasticity of demand is 0.33.