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Calculating Price, Cross, Income Elasticity of demand

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Using the "arc formula" and the data from the table below, compute where possible the own- price and income elasticities of demand. (remember that these elasticities are computed holding all other variables constant).

Price quantity price of related goods income
$10 600 $20 $ 16,000
$10 600 $30 $22,000
$12 500 $30 $22,000
$10 500 $20 $22,000

A. Compute owner price elasticity of demand?

B. Demand is -------- (elastic, inelastic, Unitary elastic)?

C. The cross price elasticity of demand= ------- ?

d. The related good is a------- ?

E. The income elasticity =------- /

F. The good is a ...... good?

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Solution:

A. Compute owner price elasticity of demand?
Price    quantity      price of related goods     income
$10       600           $30                         $22,000
$12       500           $30                         $22,000

Q1=60 Q2=500
P1=10 P2=12

Ep =

Where Ep = Coefficient of price elasticity
Q1 = original quantity ...

Solution Summary

Solution describes the steps to calculate price elasticity, cross elasticity and income elasticity of demand on the basis of data given. It predicts nature of good and related good based upon elasticities.

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See Also This Related BrainMass Solution

Elasticity of demand

A company has the following demand function for its product.

Q=40,000-200P+500I+100Px
Where P is the price of the firm's product, I is household disposable income in thousands of $, and Px is the price of a competitor's product.

The firm charges a price of $ 100 per unit.
Estimated household income = $ 50. (in thousands of $)
The competitor's price = $ 95 per unit.

A. What is the estimated demand for the firm's product?
B. Determine the point price elasticity.
C. Determine the point income elasticity.
D. Determine the point cross price elasticity.

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