A firm has tracked the quantity demanded of its output during four time periods.

Question

A firm has tracked the quantity demanded of its output during four time periods. Product price, consumer income, and advertising expenditures also were recorded for each time period. The information is provided in the table that follows. Use it to calculate the arc elasticity of demand with respect to:
a) Price (use periods 1 & 2).
b) Income (use periods 2 & 3).
c) Advertising (use periods 3 & 4).

Time Period 1 2 3 4
Quantity 120 80 100 80
Price 20 30 30 30
Income 150 150 250 250
Advertising 50 50 50 30

Explanation / Answer

I am going to use the letter "D" to denote "change in." In each elasticity, we use the midpoint prices and quantities. A) Price elasticity = DQ/DP * P/Q = 40/10 * 25/100 = 1 B) Income Elastcity = DQ/DI * I/Q =20/100 * 200/90 = 0.44 C) Advertising Elasticity = DQ/DA * A/Q =20/20 * 40/90=0.44

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