Question

Suppose the demand curve for product Y is given by Q = 300 – 2P + 4I, where I is income measured in thousands of dollars, P is price of product Y in $, Q is quantity of product Y. The supply curve is Q = 3P + 50, If I = 25. a) What is the price elasticity of demand for product Y at the equilibrium? b) What is the income elasticity of demand for product Y?

Answer 1

$$300-2p+100=3p+50$$

$$5p=350$$

$$p=70$$

$$Q=260$$

a)

$$E_p=-2\times \frac{70}{260}=-0.538$$

b)

$$E_I=4\times \frac {25}{260}=0.385$$