Assignment #4

Demand Elasticity calculation

1.Given : Qx = 250,000 - 500P - 1.50M - 240 Pr

P is price of good X, M is average income of consumers, and Pr is the price of related good R. The values of P,M, and Pr are $200, $60,000 and $100 respectively.

a.Compute the quantity of good X demanded for the given values of P,M, and Pr. (15pts)

b.Calculate the price elasticity of demand. Is the demand elastic, inelastic, or unitary elastic? How would increasing the price of X affect total revenue?(15 pts)

c.Calculate income elasticity of demand. Is good X normal or inferior?(15 pts)

d.Calculate cross price elasticity. Are goods X and R substitutes or complement?

(15 pts)

2.Explain the relationship between elasticity, total revenue, and marginal revenue. If you have a new product in the market, will you set the product price in the elastic or inelastic area? Why?

(40 pts)