Round all answers to 2 decimal places and be sure to show all your work and calc
ID: 1164849 • Letter: R
Question
Round all answers to 2 decimal places and be sure to show all your work and calculations. A. Calculating Demand Elasticitles Where: Pi 9 P2=5 M-30 Q1-108+0.02M-7Pi +3P2 Using the point formula, calculate own-price, cross price, and income elasticities: 1. Own-Price Elasticity Is the good elastic or inelastic? 2. Cross-Price Elasticity Are Good 1 and 2 complements or substitutes? Explain 2 ways to 'know' this. 3. Income Elasticity The Good 1 an inferior, normal-necessary, or a normal-luxury good?Explanation / Answer
1).
Consider the given problem here the demand for “good1” is given by.
=> Q1 = 108 + 0.02*M – 7*P1 + 3*P2, where “P1=9”, “P2=5” and “M=30”.
So, Q1 = 108 + 0.02*30 – 7*9 + 3*5 = 60.6, => Q1=60.6.
So, here “dQ1/dP1 = (-7)”, => the own price elasticity is given by, “e1 = dQ1/dP1*(P1/Q1) = (-7)*(9/60.6) = (-1.04), => e1 = (-1.04).
So, here we can see that the absolute value of the elasticity of demand is “1.04 > 1”, => it’s a relatively elastic demand curve.
2).
Now, given the demand curve, “dQ1/dP2 = 3”, => the cross price elasticity of demand is given by, “e2 = (dQ1/dP2)*(P2/Q1) = 3*(5/60.6) = 0.25”, => “e2 = 0.25”.
As we can see that the “cross price elasticity od demand” is positive, => the goods are substitute to each other, => as the price of “good 2” increases the quantity demanded of the “good 1” also increases. Here we can get to know this is by checking the sign of “dQ1/dP2” and by “e2”, the cross price elasticity of demand.
3).
Now, given the demand curve, “dQ1/dM = 0.02”, => the cross price elasticity of demand is given by, “em = (dQ1/dM)*(M/Q1) = (0.02)*(30/60.6) = 0.0099 = 0.01”, => “em = 0.01”. Now, as the “income elasticity” is positive and less than “1”, => the good is a “normal-necessary good”.
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