28. Explain Income Elasticity and Cross Elasticity.
R.J. Smith Corporation is a publisher of novels. The Corporation hires an economist to determine the demand for its product. After months of hard work, the analyst tells the company that the demand for the firm's novels (Qx) is given by the following equation:
Q¬x = 12,000 - 5,000Px + 5I + 500Pc
Where Px is the price charged for the R.J. Smith novels, I is income per capita and Pc is the price of books from competing publishers. Using this information the board of directors want you to
(a) Determine what effect a price increase would have on total revenues.
(b) Evaluate how sales of the novels would change during a period of rising incomes.
(c) Assess the probable impact if competing publishers raise their prices.
Assume initial values of Px, Pc and I are $5, $10,000 and $6 respectively.
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