# Calculate income elasticity of demand advertising elasticity

Suppose you have the following hypothetical demand or sales function.

Qx= -4Px+2Py+0.20I+0.04A

and

PX = $200, (price of good X)

PY =$230, (price of good Y)

I = $1,500 (disposable per capita income)

A =$12,000 (advertizing expenditures)

1. Calculate the income elasticity of demand for product X when I= $1,500. How could we classify product X? Is product X a cyclical or noncyclical good? Is product X a luxury good or necessity? Explain why. Suppose the economy is in a recession and per capita disposable income is expected to decrease by 5%. What percentage effect on sales would you expect to take place?

2. Given that advertizing expenditures are equal to $12,000, calculate the advertising elasticity.

#### Solution Summary

Calculate income elasticity of demand, advertising elasticity