Question

In: Economics

     Getwell Pharmaceutical Ltd. has developed a new medical product Y to relieve hay fever symptoms. Analysis...

     Getwell Pharmaceutical Ltd. has developed a new medical product Y to relieve hay fever symptoms. Analysis of demand in 20 regional markets suggests the following demand function for the product Y:

                                                QY = 5680 – 20PY + 0.05Pop +1.5A + 0.4I

where QY is market demand for product Y, PYis the price of Y, Pop is population, A is advertising expenditures ($), and I is average household disposable income ($).

In a typical market, the unit price of Y is $9, Pop = 30,000 persons, A is $50,000 and I = $45,000.

  1. Calculate the expected level of demand in a typical market.                        

  1. Calculate income elasticity of demand for the product Y. Interpret your answer.

  1. Calculate price elasticity of demand for product Y.

Advise the management at Getwell Pharmaceutical Ltd. whether they should change the price of product Y, in order to increase the total revenue received.  Justify your answer.                                                           

                                                                                                                          

  1. Statement – “According to the market demand analysis, a 100% reduction in the price of product Y would be necessary to fully offset the effects of a 1% decline in income”.

            Use the information provided in this question to discuss whether this statement is true or false. Be sure to explain why.                                                                                                       

Solutions

Expert Solution

Thus the given statement is true.

Rahul Sunny answered 1 year ago
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