Essay
A firm has estimated the following demand function for its product:
Q=58 - 2 P +0.10 I + 15 A
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=$10, I=120, and A=10. Use the point formulas to complete the elasticity calculations indicated below.
(i) Calculate quantity demanded.
(ii) Calculate the price elasticity of demand. Is demand elastic, inelastic, or unit elastic?
(iii) Calculate the income elasticity of demand. Is the good normal or inferior? Is it a necessity or a luxury?
(iv) Calculate the advertising elasticity of demand.
Correct Answer:
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(i) Q = 58-(2)(10) + (0.10)(12...View Answer
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