Suppose the demand function for a firm’s product is given by ln QXd = 7 - 1.5 ln

Question

Suppose the demand function for a firm’s product is given by ln QXd = 7 - 1.5 ln PX + 2 ln PY - 0.5 ln M + ln A where: Px = $15 Py = $6 M = $40,000, and A = $350 a. Determine the own price elasticity of demand, and state whether demand is elastic, inelastic, or unitary elastic. Own price elasticity: Demand is: (Click to select)inelasticunitary elasticelastic b. Determine the cross-price elasticity of demand between good X and good Y, and state whether these two goods are substitutes or complements. Cross-price elasticity: These two goods are: (Click to select)substitutescomplements c. Determine the income elasticity of demand, and state whether good X is a normal or inferior good. Income elasticity: Good X is: (Click to select)inferiornormal d. Determine the own advertising elasticity of demand.

Explanation / Answer

Since the given demand function is in log log form, so the coefficients of the independent variables in the model depict elasticity.

a. Own price elasticity of demand is 1.5. Since it is greater than 1, so demand for the good is elastic.

b. Cross price elasticity between good X and good Y = +2. Since it is positive, so both goods are substitutes.

c, Income elasticity of demand = -0.5

Since, it is negative so the good is an inferior good.

d. Own advertisement elasticity of demand is 1.

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