Answer to Question #154770 in Macroeconomics for Ntibwirizwa Marie Alice

Question

Given the following demand function for good X;

  Qdx=50-0.4Px+0.5Py-0.25B

Where Px is price of good X;

      Py is price of good Y;

   B is cosumer’s income.

Suppose Px=20; Py=30; and B=52

Find the value of:

Price elasticity of demand 

Cross elasticity of demand

Income elasticity of demand

What is the relationship between good X and good Y?

What would you advise the producer of good Y when the price of good X goes up? 

Answer 1

price elasticity = ($\Delta$Q/$\Delta$P)* (P/Q)

Qdx = 44

$\therefore$ price elasticity = -0.4 * (20/44) = -0.18

cross elasticity = ($\Delta$Qx/$\Delta$Py) * (Py/Qx)

=(0.5) * (30/44) = 0.34

income elasticity = ($\Delta$Q/$\Delta$Y) * (Y/Q)

=--0.4 * (52/44) = -0.47

Relationship between X and Y

Goods x and y are substitutes

The producer of good y should maintain the price of the good y when the price for good x goes up so as to increase sales