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    Determining and interpreting elasticities of demand

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    In Qx = 3-0.5 in Px - 2.5 In Py + lnM + 2lnA

    ln being natural log

    Where
    Px = $10
    Py = $4
    M = $20,000
    A - $250

    a) Determine the own price elasticity of demand and state whether demand is elastic, inelastic or unitary elastic
    b) Determine the cross price elasticity of demand between good X and good Y and state whether these two goods are substitutes or compliments
    c) Determine the income elasticity of demand state whether good X is normal or inferior
    d) Determine the own advertising elasticity of demand

    © BrainMass Inc. brainmass.com April 3, 2020, 6:46 pm ad1c9bdddf
    https://brainmass.com/economics/demand-supply/225810

    Solution Preview

    Solution:

    a) Determine the own price elasticity of demand and state whether demand is elastic, inelastic or unitary elastic

    In Qx = 3-0.5 in Px - 2.5 In Py + lnM + 2lnA
    Differentiating with respect to Px both sides we get
    (1/Qx) *d(Qx)/dPx=-0.5*(1/Px)
    dQx/dPx=-0.5*Qx/Px

    We Know, Own price elasticity of demand=(dQx/dPx)*(Px/Qx)
    =-0.5*(Qx/Px)*(Px/Qx)=-0.5
    Absolute value of own ...

    Solution Summary

    Solution describes the steps for calculating own price elasticity, cross price elasticity, income elasticity and advertising elasticity of demand for a given natural logarithm function. It also predicts the nature of related good and nature of given demand based upon elasticities.

    $2.19

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