Question

1) A firm has estimated the following demand function for its product:
Q = 58 - 2P + 0.10I + 15A
where Q is Quantity Demanded per month in thousands, P is product price, I is an index of consumer income, and A is advertising expenditures per month in thousands. Assume that P = $10, I = 120, and A = 10. If so, the income elasticity of demand is

a) .06

b) .18

c) .36

d) .86

2.  Assume that P = $10, I = 120, and A = 10. If so, then the price elasticity of demand is

a) -0.10

b) -2.50

c) -1.20

d) -0.40

3. Assume that P = $10, I = 120, and A = 10. If so, Quantity Demanded is

a) 300

b) 200

c) 250

d) 150

Answer 1

1) Q = 58-2*10+0.10*120+15*10 = 58-20+12+150 = 200

Income elasticity = 0.10*120/200 = 0.06

option(A)

2) Price elasticity = -2*10/200 = -0.1

option(A)

3) Quantity demanded = 200

option(B)