Question

1. (34 points) Consider the demand function for good X: x= (A P3 - MP,Px M = income M= 1 Px = 1 Py = 3 a) (7 points) Calculate the value of own-price elasticity of good X, ε. b) (9 points) Suppose ε = -0.9. Explain what this tells you. c) (7 points) Calculate the value of cross-price elasticity (the elasticity of good X with respect to the price of good Y), Exp... d) (11 points) Suppose Exp, = 2. Explain what this tells you.

Answer 1

@ x= 1 Pg - MPyrke - 0 M=1, Pr = 1, Py = 3 Put all the value in ea 0 we hel = 131-113)(0) Own-price elasticity of Good x de col Ed ( to program forte ( -10) --- dla The value of own price elaihity' of Good x = -05 - 6 E= -9 mean it in Irelastic demand that shows price and total Revenue move in SAME direction © Goow price elasticity = doen 9) (4 g -91618)( ) MP) 13)

EuRy = fer y no hk) (1) (213-110)) (1) - TEM Py = 2.5 205

Ed Ex Py = 2 mean it cuors price elasticity is positive which shows that Good a and Goody are substitute Good. Price of a ↑ , the demand of Good y ↑ le