A simple linear demand function may be stated as Q = a - bP + cI where Q is quantity

demanded, P is the product price, and I is consumer income. To compute an appropriate

value for c, we can use observed values for Q and I and then set the estimated income
elasticity of demand equal to:

c(I/Q)

Given Q = a - bP + cI;

Since Income Elasticity of Demand = ( change in Q / change in Income ) x ( I / Q )

NOTE: this is equivalent to taking ( change in Q / change in Income ) x COEFFICIENT ON INCOME

EX: to find the Income Elasticity of Demand, multiply the coefficient of M with M/Q

Change in Q / Change in Income = ( I / Q ) x c

The introduction of refrigerators into American homes:

increased the magnitude of the short run own price elasticity of demand for RAW meat.

Elasticity measures:

the % change in one variable in response to a 1% increase in another variable.

Refer to Figure 2.1. At Point B, demand is:

elastic, but not infinitely elastic.

Inelastic demand implies:

that a 1% increase in price results in a smaller than 1% decrease in QD.

Suppose that the cross price elasticity of demand between goods A and B = 1.5. Which
of the following is TRUE?

A and B are substitutes because the cross price elasticity is positive

Use this demand function to answer the following questions:
QDX = 56 – 2PX
At PX = $8, what is the own-price elasticity of demand for good X?

-0.4000

= 56 - 2(8) = 40 units of good X

= ( -2 ) x ( $8 / 40 units ) = -.4

Use this demand function to answer the following questions:

QDX = 2000 – PX − 2PY + 0.1M + 0.02AX, where PX is the price of Good X, PY is the price of
Good Y, M is the average consumer income and AX is the amount spent to advertise
Good X.
At PX = $100, PY = $100, and M = $1,000, and AX = $10,000 what is the income elasticity of
demand for Good X?

0.0500

= 2000 - (100) - 2(100) + 0.1(1,000) + 0.02(10,000) = 2,000 units of good x

= ( 0.1 INCOME COEFFICIENT ) x ( $1,000 Income / 2,000 units of good x ) = 0.05

Use this demand function to answer the following questions:

QDX = 2000 – PX − 2PY + 0.1M + 0.02AX, where PX is the price of Good X, PY is the price of
Good Y, M is the average consumer income and AX is the amount spent to advertise Good X.
At PX = $100, PY = $100, and M = $1,000, and AX = $10,000 what is the cross-price
elasticity of demand between Good X and the price of Good Y?

-0.1000

= 2000 - (100) - 2(100) + 0.1(1,000) + 0.02(10,000) = 2,000 units of good x

= ( -2 ) x [ $100 / 2,000 units of good x 0 = -0.1