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Market Researchers at the Lawrence Company estimate that the demand function for a product is
Q = 75 P-2 I-2
Q is quantity demanded, P is Price, and I is Income.
Marginal cost is estimated to be $15.

a. They have their product priced at $30. Is this optimal? Why or why not.
b. What would you recommend their optimal price to be?
c. How would you classify the product in terms of it's income elasticity?

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Solution Summary

This job illustrates income elasticity.

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a)
For optimum price, the condition is MR=MC
MC=$15
For MR, first rewrite the equation Q=75*P^-2*I^-2 for P.
P^2=75*Q^-1*I^-2
P=(75*Q^-1*I^-2)^0.5

Now ...

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