Suppose Demand Is Given By Q X D 50 4 Px 6 Py Axwh
Suppose Demand Is Given By Q Xd 50 4px 6py Axwh
Suppose demand is given by Qxd = 50 - 4Px + 6Py + Ax, where Px = $4, Py = $2, and Ax = $50. Determine the quantity demanded of good X, the own price elasticity at Px = $4, and the cross-price elasticity between goods X and Y at that price. Interpret whether the goods are substitutes or complements based on elasticity.
Paper For Above instruction
Understanding demand functions is fundamental in economics, providing insights into consumer behavior and pricing strategies. In this analysis, we examine a specific demand function for good X and compute key metrics such as quantity demanded and elasticities, which inform us about how sensitive consumer demand is to price changes and the relationship between related goods.
Given the demand function:
Qxd = 50 - 4Px + 6Py + Ax
with the parameters Px = $4, Py = $2, and Ax = $50, we proceed to compute the specific values and elasticities.
Quantity Demanded of Good X
Substituting the values into the demand function:
Qxd = 50 - 4(4) + 6(2) + 50
= 50 - 16 + 12 + 50
= 96
Thus, the quantity demanded of good X when Px is $4, Py is $2, and Ax is $50, is 96 units.
Own Price Elasticity of Demand
The point elasticity of demand with respect to its own price is given by:
Elasticity = (dQ/dPx) * (Px/Q)
From the demand function, the marginal change of Q with respect to Px is:
dQ/dPx = -4
Using the known Px = 4 and Q = 96, the elasticity is:
Elasticity = (-4) (4 / 96) = -4 (1/24) = -1/6 ≈ -0.1667
This elasticity value indicates that demand is inelastic at Px = $4 because the absolute value is less than 1.
In particular, a 1% increase in price would lead to approximately a 0.17% decrease in quantity demanded.
Cross Price Elasticity Between Goods X and Y
The cross-price elasticity (CPE) measures how demand for X responds to the price of Y:
CPE = (dQxd/dPy) * (Py/Q)
from the demand function, the partial derivative with respect to Py is:
dQxd/dPy = 6
Therefore, plugging in the values:
CPE = 6 (2 / 96) = 6 (1/48) = 1/8 = 0.125
The positive value of 0.125 suggests that goods X and Y are substitutes, as an increase in the price of Y leads to an increase in demand for X.
This is consistent with substitution effects, indicating that consumers may switch from Y to X when Y becomes relatively more expensive.
Conclusion on Elasticities and Goods Relationship
The calculated own price elasticity reveals that demand for good X is relatively inelastic at the specified price, meaning consumers do not reduce demand proportionally to price increases. Meanwhile, the positive cross-price elasticity confirms that X and Y are substitute goods, with a moderate degree of substitutability. Understanding these elasticities helps businesses and policymakers anticipate demand responses to pricing strategies and cross-market influences.
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