The demand curve for the new computer game, Rock and Roll trivia, is given as fo

Question

The demand curve for the new computer game, Rock and Roll trivia, is given as follows: Q = 200-5P-.1Pc-.5Pd+.2A-I

Where P is the price of the game, Pc is the price of a computer, Pd is the price of a diskette, A is the level of advertising, and Q is the level of income.

Using that information, suppose P=10, Pc=100, Pd=2, A=5, and I=50.

So then, Q=200-5(10)-.1(100)-.5(2)+.2(5)-(50).

Q=90 (level of income)

How do I get to the income elasticity of demand (-1/90) from here? Please write out calculations & use text to help explain. Thanks Cheggers.

Explanation / Answer

Q = 200 - 5P - 0.1Pc - 0.5Pd + 0.2A - I

Given all values, when I = 50, Q = 90.

Income elasticity of demand = (dQ / dI) x (I / Q)

= - 1 x (50 / 90)

= - 0.56

Note that you got the concept of income elasticity wrong. The value (- 1/90) is the Coefficient of income - it represents sensitivity of quantity demanded to a change in income. This means, if income falls (rises) by $1, quantity demanded will rise (fall) by $(1/90) when all other variables are unchanged. But to compute income elasticity, you need to take the differential (dQ / dI), which equals to Coefficient of I (= - 1).

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.