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 Preview

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 ...

Solution Summary

This solution provides a step-by-step explanation of the calculations for income elasticity of demand and advertising elasticity.

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