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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.

    © BrainMass Inc. brainmass.com April 3, 2020, 7:40 pm ad1c9bdddf
    https://brainmass.com/economics/elasticity/calculating-price-income-cross-price-elasticity-of-demand-274388

    Solution Preview

    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 Summary

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

    $2.19

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