Calculate the elasticity of demand for good x

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Reference no: EM13151939

The demand for good X is given by the following equation:

Q_X = 10 P_X^-2.4 P_Y I^1.2A_X ^0.001A_Y^-0.003

where P_X and P_Y, and P_Z are the prices of X and Y, I is per capita income, A_X is advertising on good X, and A_Y is advertising on good Y.

(a) Should the price of X be increased or decreased if the firm is interested in maximizing revenue?

(b) Are goods X and Y gross substitutes or complements?

(c) By how much must the price of X change if per capita income decreases by 4% and the goal is to keep Q_X constant?

(d) Calculate the elasticity of demand for good X with respect to advertising on good X. Interpret your answer. Can you tell whether the firm is spending too much or too little on advertising?

(e) If the manufacturer of good Y stops advertising completely, what would be the impact on demand for good X according to this demand equation?

Reference no: EM13151939

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