Suppose you have the following hypothetical demand or sales function.
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.
Let's substitute everything (except I) into the equation.
Q = -4(200) + 2(230) + 0.2I + 0.04(12000)
This becomes Q = 0.2I + 140.
elasticity = dQ/dI X ...
This solution provides a step-by-step explanation of the calculations for income elasticity of demand and advertising elasticity.