Suppose that the demand for pencils by a representative consumer is given by X = 19.4 + 0.4M - 8P + 2Pf where,

X is quantity of pencils demanded, M is income in dollars, P is the price of pencils in dollars and Pf is price of fountain pens in dollars. Suppose that the values of these variables for the consumer are,

X = 25, M = 20, P = $0.80 and Pf = $2

(a) Calculate the own-price elasticity of demand and the income elasticity of demand for pencils. Interpret the results obtained. (10 marks)

(b) Suppose that an increase in the price of ink refills results in a 20 percent increase in the cost of using a fountain pen. What will be the percentage increase in the quantity demanded of pencils? (