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

Solution Preview

Point price elasticity of demand between good X and the substitute Good ...

... of price elasticity Q1 = original quantity demanded Q2 = new quantity demanded P1 = Original ...Demand is unitary elastic. C. the cross price elasticity of demand...

...Cross price elasticity of demand= Where Q2=New quantity demanded=4800 units Q1=Original quantity demanded=10000 units PR2=New price of related good=137-52=$85 ...

... Point Cross Price Elasticity of demand =(dQ/dPx)*(Px/Q) dQ/dPx=100 We have calculated in part (a), Q=54500 at Px=$95 Put these values in the formula as under ...

Cross-Price Elasticity of Demand. (a)If the price of pork increases by 10 percent, by how much does the demand for beef change? ...Cross-Price Elasticity of Demand. ...

...Cross price elasticity of X=% change in demand of X/ % change in prices of related good (Y) 1.56=% change in demand of X/10% % change in demand of X =1.56*10 ...

... (c) If Mr. Miller spends all his income on steak (regardless of his income or the price of steak), his cross elasticity of demand between steak and any other ...