Project Appraisal 2

In: Business and Management

Submitted By kenov1212
Words 509
Pages 3
1. EXERCISES – LECTURE 2

1. QUESTION:

Find point price elasticity, point income elasticity and point cross-price elasticity at P=10, Y=20, and Ps=9, if the demand function were estimated to be: Qd = 90 – 8.P + 2.Y + 2.Ps

Is the demand for this product elastic or inelastic? Is it a luxury or a necessity? Does this product have a close substitute or complement? Find the point elasticity of demand.

2. ANSWER:

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Q2 – Q1 P2

Q2 P1 – P2

QD = 90 – 8P + 2Y + 2P = 90 – 8(10) + 2 (20) + 2 (9)

QD = 90 – 80 + 40 + 18 = 68 Quantity of the good.

Point elasticity = QD = 90 – 8P

Demand curve = QD = 90 – 8P

Q 10 -80 -8 - = -8 = = P 90 90 9

Income Elasticity = % Q If Y = 0, QD = 90

% Y

QD = 90 + 2Y

Q = = 2 (coefficient of demand & income function) Y

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