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The general linear demand for good X is estimated to be Q = 125,000 400P 0.

Q3. The general linear demand for good X is estimated to be
Q = 125,000 − 400P − 0.76M + 360PR             (6 Pts)
where P is the price of good X, M is 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.
a. Compute the quantity of good X demanded for the given values of P, M, and PR.
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.
c.  A decrease in price would increase total revenue. The resulting increase in quantity will be higher than the decrease in price. If price decreases by 1%, quantity demanded will increase by 1.48%.
d. 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.
e. 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?
F.   

 

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