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Point price, income and cross elasticities

The McNight Company is a major producer of steel. Management estimates that the demand for its steel is given by the equation: Qd = 500 - 1000P + 0.1Y + 300Pa, where Q = steel demand in thousands of tons per year, P = price of steel in dollars per pound, Y is income per capita, and Pa is the price of aluminum in dollars per pound. Initially the price of steel is $1 per pound, income per capita is $20,000, and the price of aluminum is $0.80 per pound.

A. How much steel will be demanded at the initial prices and income level?
B. Based on the equation, what is the relationship between steel and aluminum? Explain briefly how you know.
C. What are the point price, income, and cross elasticities at the present values? Interpret your answers, saying how much a 1% change in each variable impacts demand.
D. If the objective is to increase total revenue, should the price be increased or decreased? What if the objective is to increase total profit? Explain.

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Demand of Steel
The McNight Company provides the steel for customers and organizations. Company management estimates that demand for steel is calculated by following equation:
Qd = 500 - 1000P + 0.1Y + 300Pa
Where, Qd represents the steel demand in thousands of tons in per year
P= Price of steel in dollars per pound ($1)
Y= Income per capital ($20,000)
Pa= Price of aluminum in dollars per pounds ($0.80)
Qd= 500- 1000(1) + 0.1(20000) + 300(0.80)
= 500-1000 + 2000 + 240
=2740-1000
=1740 thousands of tons
The demand of steel will be 1740 in thousands of tons at the initial prices and income level.
Relationship between Steel and Aluminum
On the basis of above equation, it can be said that demand of the steel is the based on the price of Aluminum. Increases and decreases in the prices of Aluminum impact on the demand of steel (Hall & Lieberman, 2009). In present time, price of aluminum is $0.80 per pound and a decline in the price of it will reduce the demand of steel. It is explained by this example:
Assume price of aluminum declines to ...

Solution Summary

Point price, income and cross elasticities are examined.

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