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Cross Price Elasticity of Demand

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A manufacturer has estimated that the demand for its product as

Qx = 500 - 2Px + .5I + .65Pz - 1.8Py

where Qx is the quantity demand, Px is the price, I is average annual income (currently $14,000). Pz and Py are the prices of related goods. Total costs are given by TC = 3,500,000 + 500Q

Suppose that PZ= $3000 and PY=$250 and that the firm currently charges $2500 for X.

a)(7 pts) At the current values, what is the cross point price elasticity of demand between good X and the substitute good? Interpret the elasticity. Answer given as .4875

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Cross Price Elasticity of Demand is emphasized.

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