Managerial Economics Reaction Paper

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Managerial Economics Question Set

The demand function for Good X is defined as Qx = 75-2Px - 1.5Py, where Py is the price of Good Y. Calculate the price elasticity of demand using the point formula for Px = 20 and Py = 10. Determine whether demand is elastic, inelastic, or unit elastic with respect to its own price and whether Good Y is a substitute or a complement with respect to Good X.

Py

Substitute Px = 20 and Py = 10:

To find PED, another variable point is needed:

Increase Px by 15% (23),

6/20 x 100% = -30%

PED = -30/15 = -2

Because PED < -1, the demand is price elastic.

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(A rise in the price by $1 results in a reduction in Q. Of 2).

Let Py increase by 50% = 15

When Py increase, Qx= 75-2(20) - 1.5(15) = 12.5

The percentage of change in Qx = -(20-12.5)/20 x 100% = -37.5%

To find XED, use the equation (-37.5/12.5) / (50/15) = -0.9

Because XED is negative, Good Y is a complementary good. (Good Y is a complementary good because it has a negative value. If Good Y were a substitute good, any increase in the price of Y would result in an increase in the quantity demanded of X. Alternatively,.....

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