Question

4: Number 4 The demand function for good X is given by the equation, Qu (Po, P,, Y) 520-20Pa + 0.6Y + 2.9Po, determine the price, income (Y), and cross-price elasticities of demand when Pa = 10, P, 21, and Y-700.

Answer 1

Answer : 4) Putting all given values in Qx we get,

Qx = 520 - (20 * 10) + (0.6 * 700) + (2.9 * 21)

=> Qx = 520 - 200 + 420 + 60.9

=> Qx = 800.9

Given Qx = 520 - 20Px + 0.6Y + 2.9Py

Price elasticity of demand (Ed) = ( $\Delta$Qx / $\Delta$Px) * (Px / Qx)

=> Ed = - 20 * (10 / 800.9)

=> Ed = - 20 * 0.01

=> Ed = - 0.2

Therefore, here the price elasticity of demand is - 0.2 .

Income elasticity of demand (Ei) = ($\Delta$Qx / $\Delta$Y) * (Y / Qx)

=> Ei = 0.6 * (700 / 800.9)

=> Ei = 0.6 * 0.87

=> Ei = 0.5

Therefore, here the income elasticity of demand is 0.5 .

Cross price elasticity of demand (Exy) = ($\Delta$Qx / $\Delta$Py) * (Py / Qx)

=> Exy = 2.9 * (21 / 800.9)

=> Exy = 2.9 * 0.03

=> Exy = 0.1

Therefore, here the cross price elasticity of demand is 0.1 .