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Supply and Demand and Elasticity Question

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.