Answer to Question #90231 in Microeconomics for Rimie

Question

A market demand is given by QA = 200 – 3PA + 2PB + 0.04M, where QA is the quantity demanded of good A, PA is good A’s price, PB is good B’s price, and M is the average good A’s consumer monthly income. If PA = $12, PB = $10, and M = $2,500,

a. calculate good A’s (point) own-price elasticity;

b. calculate good A’s (point) cross-price elasticity;

c. calculate good A’s (point) income elasticity;

d. Are A and B complements or substitutes? Explain how you know.

Answer 1

a) -3 (because it is the coefficient near PA in the equation)

b) 2 (because it is the coefficient near PB in the equation)

c) 0.04 (because it is the coefficient near M in the equation)

d) They are complements, because their cross-price elasticity is positive