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Calculate the income elasticity of demand em

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Reference no: EM132612942

The general linear demand for good X is estimated to be

Q = 125,000 - 400P - 0.76M + 360PR

where P is the price of good X, M is the average income of consumers who buy good X, and PR is the price of related good R. The values of P, M, and PR are expected to be $200, $45,000, and $120, respectively. Use these values at this point on demand to make the following computations.

Question a. Compute the quantity of good X demanded for the given values of P, M, and PR.

Question b. For the quantity in part a, calculate the point price elasticity of demand. At this point on the demand, is demand elastic, inelastic, or unitary elastic? How would decreasing the price of X affect total revenue? Explain.

Question c. Calculate the income elasticity of demand EM. Is good X normal or inferior? Explain how a 3.5 percent decrease in income would affect demand for X, all other factors affecting the demand for X remaining the same.

Question d. Calculate the cross-price elasticity EXR. Are the goods X and R substitutes or complements? Explain how a 6 percent increase in the price of related good R would affect demand for X, all other factors affecting the demand for X remaining the same?

Reference no: EM132612942

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