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Calculating price, income & cross price elasticity of demand

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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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Solution depicts the methodology to calculate price, income & cross price elasticity of demand.

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A. What is the estimated demand for the firm's product?

Q=40000-200P+500I+100Px
P=$100
I=$50 (in '000)
Px=$95
Q=40000-200*100+500*50+100*95=54500
Estimated demand=54500

B. Determine the point price elasticity.

Point Price Elasticity of demand =(dQ/dP)*(P/Q)
dQ/dP=-200
We have calculated in part (a), Q=54500 at ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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