Question

27. Viking InterWorks is a manufacturer that supplies memory products to original equipment manufacturers of desktop systems. The CEO read that the upcoming year’s projected demand for 512 MB desktop memory modules is Qd(memory)= 20000-80p(memory) -P(desktops)+ 0.6M. Where P(memory)  is the market price for 512 MB memory module, P(desktop) is the selling price of a desktop system, and M is consumer income.
    1. Are memory modules and desktop systems complements or substitutes. Please provide a reason for your answer. (2 points).
28. 1. What would be the impact on Viking InterWorks of a $2,116 increase in consumer income, accompanied by a $100 reduction in the price of desktops? (5 points)
    2. Calculate the income and cross price elasticities of demand when P(desktops)= $1040, P(memory)= $520, and M=$50,384 (8 points)

Answer 1

Qd(memory) = 20000 -80p(memory) -P(desktops)+ 0.6M

Memory modules and desktop are complements. This is so because prices of desktops negatively impact quantity demanded of memory. As prices of desktop increases quantity demanded for memory decreases. Also, desktops and memory cannot be used separately, they are used together.

Qd(memory) = 20000 -80p(memory) -P(desktop-100)+ 0.6(M+2116)

This will increase the quantity demanded for memory. As desktop is a compliment good, a decrease in price will have an opposite impact on quantity of memory. Increase in income will increase the purchasing power of consumer hence, it will increase demand.

Qd(memory) = 20000 -80p(memory) -P(desktops)+ 0.6M

Qd(memory) = 20000 -80*(520) -1040+ 0.6*(50384)

Qd(memory) = 20000-41600-1040+30230.4

Qd(memory) = 7590.4

Elasticity cross price= diffQ/diffP(desktop)*P(desktop)/Q

diffQ/diffP = -1

P/Q=1040/ 7590.4

=0.1370

Elasticity cross price =-0.1370

Income elasticity= DiffQ/DiffM*M/Q

DiffQ/DiffM=0.6

M/Q= 50384/7590.4

6.6378

Income elasticity=6.6378*0.6

Income elasticity=3.98268