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Calculating price and elasticity of demand

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Suppose that your demand schedule for cell phone applications is as follows:

Quantity Demanded per Year Quantity Demanded per Year
Price per Application (income = $40,000 per year) (income = $50,000 per year)
$ 2 60 70
4 52 59
6 44 50
8 32 42
10 24 30

? Calculate the price elasticity of demand as the price of a cell phone application decreases from $6 to $4 if your income is: (i) $40,000 per year, and (ii) $50,000 per year. Is the price elasticity of demand elastic, inelastic or unitary elastic? Briefly explain

? Calculate the income elasticity of demand as your income increases from $40,000 to $50,000 if: (i) the price per cell phone application is $6, and (ii) the price is $8. Is the income elasticity of demand high, low or unitary? Briefly explain.

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Please refer attached file for complete solution. Expressions typed with the help of equation writer are missing here.

? Calculate the price elasticity of demand as the price of a cell phone application decreases from $6 to $4 if your income is:
(i) $40,000 per year, and

Price elasticity of demand=

(ii) $50,000 per year.

Price elasticity of demand=

Absolute value of price ...

Solution Summary

The solution describes the steps to calculate price and elasticity of demand.

See Also This Related BrainMass Solution

Calculating quantity demanded, price elasticity, income elasticity of demand, and statistical significance

1. A firm has estimated the following demand function for its product:

Q = 100 - 5 P + 5 I + 15 A

Where Q is quantity demanded per month in thousands, P is product price, I is an index of consumer income, and A is advertising expenditures per month in thousands. Assume that P=$200, I=150, and A=30. Use the point formulas to complete the elasticity calculations indicated below.

(i) Calculate quantity demanded.

(ii) Calculate the price elasticity for demand. Is demand elastic, inelastic, or unit elastic? (Hint: use equation (3-8), page 100, the price elasticity is
(-5)(200/300)= -3.33. The demand is elastic.

(iii) Calculate the income elasticity of demand. Is the good normal or inferior? Is it a necessity or a luxury?

2. A firm has kept track of the quantity demanded of its output, Good X, during three time periods. The price of X and the price of the other good, Good Y, were also recorded for each time period. The information is provided in the table that follows. Use it to calculate the own-price arc elasticity of demand and the cross-price elasticity of demand. Determine whether Good Y is a complement or a substitute for Good X.

Time Period 1 2 3
Quantity of X 220 80 250
Price of X 15 25 15
Price of Y 10 10 5

3. Just The Fax, Inc. (JTF) has hired you as a consultant to analyze the demand for its line of telecommunications devices in 35 different market areas. The available data set includes observations on the number of thousands of units sold by JTF per month (QX), the price per unit charged by JTF (PX), the average unit price of competing brands (PZ), monthly advertising expenditures by JTF (A), and average gross sales (in $1,000) of businesses in the market area (I). The results of a regression analysis (with standard errors in parenthesis) are given below.

Q X = 300 - 6 PX + 2 PZ + 0.04 A + 0.01 I
(200) (1.8) (0.8) (0.03) (0.004)

R2 = 0.91 S.E.E. = 3.6

Evaluate the statistical significance of each of its coefficients. (Hint: the t ratio for Px is -3.33 (=-6/1.8), and significant)

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