Answer to Question #39432 in Macroeconomics for Sarah

Question

The demand for Wanderlust Travel Services (X) is estimated to be:
QX =22,000–2.5PX +4PY –M+1.5AX

where AX represents the amount of advertising spent on X, M is income per capita, and the other variables have their usual interpretations.

Suppose that the price of good X is $450, good Y sells for $40, the company utilizes 3000 units of advertising, and consumer income is $20,000.

A. Calculate the elasticity of demand for good X with respect to the price of X, the price of Y, income, and advertising.

B. Should the price of good X be raised to increase total revenue? Explain why or why not.

C. Calculate consumer surplus at the profit‐maximizing price if the marginal cost is $264.