Question:

After a careful statistical analysis, the Middle East Company concludes the demand function for its product is

Q = 100 - 0.8P + 0.04 I- 5Pr+ 2Py

where Q is the quantity demanded of its product, P is the price of its product, Pr and Py are the prices of rivals' products, and I is per capita disposable income (in dollars). At present, P = $10, Pr = $6, Py =4 $ and I = $500.

a. What is the economic meaning of this function?

b. What is the price elasticity of demand for the firm's product?

c. Do you think it is good advice to reduce the price to $ 6?

d. What is the income elasticity of demand for the firm's product?

e. What is the cross-price elasticity of demand between its product and rivals' products?