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

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... d) Calculate the cross ... to I, we get Qh/dI=0.0005 We have calculated in part ... It also calculates elasticity of demand with respect to each variable and discusses ...

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... monthly income = 4,000 Calculate the elasticity... price elasticity, cross price elasticity, income elasticity, and elasticity... variable X is calculated as: ∂QX ...