Explore BrainMass
Share

Explore BrainMass

    Calculating own price, income and cross-price elasticities

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    A book publisher has the following demand function for the firm's novels (Qx):
    Qx = 12,000-5,000Px + 5I + 500Pc
    where Px is the price charged for the firm's novels, I is income per Capita, and Pc is the price of books from competing publishers.
    Assume that the initial values of Px, I, and Pc are $5, $10,000, and $6, respectively

    (A) Calculate the price elasticity and determine what effect a marginal (small) price increase from the initial price would have on total revenues?

    (B) Calculate the income elasticity and evaluate how sale of the novels would change during a period of rising incomes?

    (C) Calculate the cross elasticity and assess the probable impact if competing publishes raise.

    © BrainMass Inc. brainmass.com October 10, 2019, 2:53 am ad1c9bdddf
    https://brainmass.com/economics/elasticity/calculating-own-price-income-and-cross-price-elasticities-398262

    Solution Preview

    (A) Calculate the price elasticity and determine what effect a marginal (small) price increase from the initial price would have on total revenues

    Qx = 12,000-5,000Px + 5I + 500Pc

    Put Px=$5, I=$10000 and Pc=$6
    Qx =12000-5000*5+5*10000+500*6 =40000
    Now dQx/dPx=-5000
    Price elasticity of demand=Ed=(dQx/dPx)*(Px/Qx)=-5000*(5/40000)=-0.625

    So, we find that demand is inelastic at the initial level.

    We know that ...

    Solution Summary

    Solution describes the steps to calculate own price, income and cross-price elasticities of demand.

    $2.19