Estate Lighting Company estimated its demand function for a particular chandelie

Question

Estate Lighting Company estimated its demand function for a particular chandelier with the following results 5. Qe 995-2.15 Pe +1.78 Pc +0.05 I where: Qe quantity sold per year of the Estate Lighting chandetiers, Pe- price of the Estate Lighting chandeliers, Pc-price of a competing firm's chandelier, and I- average annual household income. Currently Pe S125, Pc S145, and I 12,000. Determine the coeficients for (a) the price of elasticity of demand, (b) the cross price elasticity, and (c) the income elasticity of demand. . Verbally describe the meaning and significance of the elasticity coefficients in (A) above.

Explanation / Answer

The demand equation is given as Qe = 995 – 2.15Pe + 1.78Pc + 0.05I

Find the value of Qe given the values of Pe, Pc and I

Qe = 995 – 2.15*125 + 1.78*145 + 0.05*12000 = 1584.35

Price elasticity = slope x P/Q = -2.15 * 125/1584.35 = -0.1696

Cross price elasticity = 1.78 * 145/1584.35 = 0.1629

Income elasticity = 0.05*12000/1584.35 = 0.3787

Price elasticity of demand that is found to be less than 1 in this case will be measuring the response in terms of consumption when there is a given percentage change in the price. In this case the demand is inelastic because the price coefficient is less than 1. Cross price elasticity of demand has a positive value which suggest that the related good is a substitute. Income is also positively related to the product because the income elasticity of demand has a positive value which suggest that the particular good is a normal good

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