DEMAND ANALYSIS: Estimation and Forecasting (Chapter 3)

Assessment 3.1

Demand Function for Good X: Qd = 200 – 5 P

Price Quantity Demanded
10 (1) 150
(2) 14 130
22 (3) 90
32 (4) 40
(5) 36 20
6. Compute the Price Elasticity of Demand for Good X:

1. Q 1 = 150
Q2 = 130
Ed =
( 130−150
)(
( 150+ 130 ) ÷ 2
÷
14−10
( 10+14 ) ÷ 2 )
P1 = 10
P2 = 14
Ed = (−20
140 ) ÷( )
4
12
Ed =(−0.14 ) ÷ ( 0.33 )
2. Q 1 = 130
(
=
Ed =0.43
90−130
)(
( 130+ 90 ) ÷2
÷
22−14
( 14 +22 ) ÷ 2 )
E =( ) ÷( )
Q2 = 90 −40 8
P1 = 14 d
110 18
P2 = 22 Ed =(−0.36 ) ÷ ( 0.44 )
Ed =0.8240−90
3. Q 1 = 90
Q2 = 40
Ed =
(
( 90+40 ) ÷ 2
÷
)( 32−22
( 22+32 ) ÷ 2 )
P1 = 22
P2 = 32
Ed = (−50
65 ) ÷( )
10
27
Ed =(−0.77 ) ÷ ( 0.37 )
4. Q 1 = 40
Q2 = 20 (
=
Ed =2.08
20−40
)(
( 40+20 ) ÷ 2
÷
36−32
( 32+ 36 ) ÷2 )
E =( ) ÷( )
P1 = 32 −20 4
d
P2 = 36 30 34
Ed =( 0.67 ) ÷ ( 0.12 )
Ed =5.58
7. Interpret the computed the Price Elasticity of Demand for Good X:
1. 0.43 < 1 = Inelastic
2. 0.82 < 1 = Inelastic
3. 2.08 > 1 = Elastic
4. 5.58 > 1 = Elastic
 Demand Function for Good Y: Qd = 450 – 6P
Price Quantity Demanded
10 (8) 390
(9) 14 366
18 (10) 342
(11) 22 318
(12) 38 222
13. Compute the Price Elasticity of Demand for Good Y:

1. Q 1 = 390
Q2 = 366
Ed =
( ( 390+
366−390
366 ) ÷2 ) ÷
( ( 10+14 ) ÷2 )
14−10

P1 = 10
P2 = 14
Ed = (−24
378 ) ÷( )
4
12
Ed =( 0.06 ) ÷ ( 0.33 )
2. Q 1 = 366
Q2 = 342
(=
Edd =0.18
342−366
)(
( 366 +342 ) ÷ 2
÷
18−14
( 14+ 18 ) ÷ 2 )
E =( ) ÷( )
P1 = 14 −24 4
d
P2 = 18 354 16
Ed =( 0.07 ) ÷ ( 0.25 )
3. Q 1 = 342 Ed =0.28
Q2 = 318
P1 = 18
P2 = 22

4. Q 1 = 318
Q2 = 222
P1 = 22
P2 = 38

14. Interpret the computed the Price Elasticity of Demand for Good Y:
1. 0.18 < 1 = Inelastic
2. 0.28 < 1 = Inelastic
3. 0.35 < 1 = Inelastic
4. 0.68 < 1 = Inelastic
15. Compute the Cross Elasticity of Demand for Good X to Y using the price 18 and 22.

Qd =200−5 P Qd =200−5 P
P = 18 P = 22
Qd =200−5(18) Qd =200−5(22)
Qd =200−90 Qd =200−110
Qd =110 Qd =90
% Change in Quantity of X % Change in Price of Y Cross Elasticity of Demand

( ( 110+ 90 ) ÷ 2 ) ( ( 18+22 ) ÷2 )
90−110 22−18 % ∆∈Quantity of X
×100 % × 100 %
% ∆∈ Price of Y

( −20
100 )
×100 % ( 1004 ) ×100 % (−20 %
20 % )
-1%
-0.2×100 % 0.2×100 %
-20% 20%

16. Which type of good is Good Y to X?

 A complementary good to Good X.
17. Compute the Income Elasticity of Demand for Good X when the income for the price of 18 is
18000 and for the price of 22 is 26000.

% Change in Quantity Demanded % Change in Income Income Elasticity of Demand

( ) ( ( 18,000+26,000 )÷2)
90−110 26,000−18,000 % ∆∈Quantity Demand
×100 % ×100 %
( 110+ 90 ) ÷ 2 % ∆∈ Income

( −20
100 )
×100 % ( 22,000 )
8,000
×100 % ( 36 % )
−20 %

-0.55
-0.2×100 % 0.36×100 %
-20% 36%

18. Which type of good is Good X?

 Good X is an inferior good.
19. Compute the Income Elasticity of Demand for Good Y when the income for the price of 18 is
18000 and for the price of 22 is 26000.

% Change in Quantity Demanded % Change in Income Income Elasticity of Demand

( ) ( )
318−342 26,000−18,000 % ∆∈Quantity Demand
× 100 % ×100 %
( 342+318 ) ÷2 ( 18,000+26,000 ) ÷ 2 % ∆∈ Income

( −24
330 )
× 100 % ( 22,000
8,000
) ×100 % (−7 %
36 % )
-0.19
−0.07 × 100 % 0.36×100 %

−7 % 36%

20. Which type of good is Good Y?

 Good Y is an inferior good.