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    Supply and Demand and Elasticity Question

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    The demand for company X product is given by Q(x) = 12 - 3P(x)+ 4P (y)
    Suppose good X sells for $3.00 per unit and good Y sells for $1.50 per unit.

    a. Calculate the cross-price elasticity of demand between goods X and Y at the given prices.
    b. Are goods X and Y substitutes or complements?
    c. What is the own price elasticity of demand at these prices?
    d. How would your answers be to parts a and c change if the price of X dropped to
    $2.50 per unit?

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    Solution Preview


    Questions a and b
    Cross-price elasticity shows the percentage variation in a the demand for a good when the precio for another good rises by 1%. The formula for cross-price elasticity is:

    Cross price elasticity = (dQx/dPy)*(Py/Qx)

    where Qx is the quantity demanded of good X, Py is the price of good Y, and 'd' is the differential operator. So (dQx/dPy) is the derivative of Q(x) with respect to Py. Let's find this derivative. We have:

    Q(x) = 12 - 3P(x)+ 4P (y)

    Therefore, the derivative of this with respect to P(y) is ...

    Solution Summary

    Supply and Demand and Elasticity Questions are posed.