Page 1 of 2 CALCULATING ELASTICITY FROM THE DEMAND FUNCTION
Q1. The general linear demand for good X is estimated to be Q 18,000 175P 0.35M 16PR
where P is the price of good X, M is average income of consumers who buy good X, and P is the
price of related good R. The values of P, M, and P are expected to be $65, $52,000, and $100,
respectively. Use these values at this point on demand to make the following computations.
R R a. Compute the quantity of good X demanded for the given values of P, M, and P . b. Calculate the price elasticity of demand E. At this point on the demand for X, is demand elastic,
inelastic, or unitary elastic? How would increasing the price of X affect total revenue? Explain. c. Calculate the income elasticity of demand E . Is good X normal or inferior? Explain how a 1.75
percent decrease in income would affect demand for X, all other factors affecting the demand for
X remaining the same. d. Calculate the cross-price elasticity E . Are the goods X and R substitutes or complements?
Explain how a 2.5 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. R M XR Q20.Using the following equation for the demand for a good or service, calculate the price elasticity of
demand, cross elasticity with good x, and income elasticity.
Q = 8-2P+0.10I+Px
where Q is quantity demanded, P is the price of the product, I is income, and Px is the price of a
related good. Assume that P=$10, I=100, and Px=20.
Q3. A firm has estimated the following demand function for its product:
Q = 10-2P+.20I+2A where Q is quantity demanded per month in thousands, P is product price, I is an index
of consumer income, and A is advertising expenditures per month in thousands. Assume that P=$5, I=50,
and A=10. Based on this information, select the correct values for: quantity demanded; price elasticity of
demand; income elasticity of demand; and advertising elasticity. Q4. The demand curve for a product is given by Qdx = 1200 – 3Px – 0.1Pz, where Pz = $300.
a. What is the own price elasticity of demand when Px = $140? Is the demand elastic or inelastic at this
price? What would happen to the firm’s revenue if it decided to charge a price below $140?
b. What is the own price elasticity of demand when Px = $240? Is the demand elastic or inelastic at this
price? What would happen to the firm’s revenue if it decided to charge a price above $240?
c. What is the cross-price elasticity of demand between good X and good Z when Px = $140? Are
goods X and Z substitutes or complements?
Q5. Suppose the demand function for a firm’s product is given by
Qdx = 7 – 1.5Px + 2Py – 0.5M + A
where
Px = $15
Py = $6
M = $40,000
A = $350 Page 2 of 2 a. Determine the own price elasticity of demand, and state whether demand is elastic, inelastic, or
unitary elastic.
b. Determine the cross price elasticity of demand between good X and good Y, and state whether
these goods are substitutes or complements.
c. Determine the income elasticity of demand, and state whether good X is a normal or inferior
good.
d. Determine the own advertising elasticity of demand.
Q6. Suppose the own price elasticity of demand for good X is -3, its income elasticity is 1, its
advertising elasticity is 2, and the cross price elasticity of demand between it and good Y is -4.
Determine how much the consumption of this good will change if:
a. The price of good X decreases by 5%.
b. The price of good Y increases by 8%.
c. Advertising decreases by 4%.
d. Income increases by 4%.
Q7. Suppose the cross price elasticity of demand between goods X and Y is 4. How much would the
price of good Y have to change in order to increase the consumption of good X by 20%?
Q8. You are the manager of a firm that receives revenues of $40,000 per year from product X and
$90,000 per year from product Y. The own price elasticity of demand for product X is -1.5, and the cross
price elasticity of demand between product Y and X is -1.8. How much will your firm’s total revenues
(from both products) change if you increase the price of good X by 2%.

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