Question

The demand function for a good is q = 56.6 − 0.25p − 0.03m + 0.45ps + 0.6n where q is the quantity demanded per week, p is the price per unit, m is the average weekly income, ps is the price of a competing good and n is the population in millions. Given values are p = 65, m = 350, ps = 60 and n = 24. a. Calculate the price elasticity of demand. b. Find out what would happen to (a) if n rose to 26. c. Explain why this is an inferior good

Answer 1

(a) q = 56.6 - 0.25*65 - 0.03*350 + 0.45*60 + 0.6*24 = 71.25
(b) q = 72.45
∆n = 2/24 = 8.3%
∆q = 1.2/71.25 = 1.7%
So, what does that mean for elasticity?