Answer to Question #39434 in Microeconomics for Sarah

Question

5.The demand for good X is given by this equation:

QX =1.0–2.0PX +0.8I+1.5PY –3PZ+1.0A

Where PX, PY, and PZ represent the prices of goods X, Y, and Z;

I measures income per capita; and A is advertising. Currently:

PX =2.00,PY =2.50,PZ =1.00,I=4,andA=3.05.

A. Is good X a necessity or a luxury good? How do you know?

B. Calculate the cross elasticity of demand for X with respect to the price of good Z. Are goods X and Z substitutes or complements?

C. Calculate the advertising elasticity of demand for X. Interpret your answer.

D. What kind of change in the price of X would you recommend if the firm is interested in maximizing revenue?