Answer to Question #50652 in Microeconomics for naeem

Question

the demand equation is estimated to be 50 - 3p + 2po where po is the price of other good. assume the average value of P is $3 and the average value of po is $6.
a. what is the price elasticity at the average values of P and Po? how should the price of the good can changed to increase total revenues?
b. what is the cross elasticity at the average values of P and Po? what is the relationship between the two goods?
c. if equation is correctly estimated is good inferior a necessity or a luxury? Explain.

Answer 1

Qd = 50 - 3P + 2Po, P = $3, Po = $6.
a. The price elasticity at the average values of P and Po is: Edp= -3 and Edpo = -2, so the demand for both goods is elastic. The price of the good can be decreased in this case to increase total revenues.
b. The cross elasticity at the average values of P and Po is zero, because these two goods are neither complements, nor substitutes.
c. To calculate if the good is inferior, a necessity or a luxury, we need to know the change in income of the consumer.