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Consider the following multiplicative demand function where QD = quantity demanded, P = selling price, and Y = disposable income:

QD = 1.6 P-1.5 Y.2

The exponent of Y (i.e., .2) indicates that (all other things being held constant):

a for a one percent increase in disposable income, quantity demanded would increase by .2 percent

b for a one unit increase in disposable income, quantity demanded would increase by .2 units

c for a one percent increase in disposable income quantity demanded would increase by .2 units

d for a one unit increase in disposable income, quantity demanded would increase by .2 percent

e none of the above

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Solution Summary

Emphasize the multiplicative demand function.

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