Question

In Maine there are two publishers competing in the market for economics textbooks: Xanadu and Yellow Submarine. The demand for the Xanadu textbooks is given by the function Q^D_X  = 5000 – 4P_X + 3P_Y + 0.05M + 0.001A_X, where P_X is the price of the Xanadu book, P_Y is the price of the Yellow Submarine book, M is the average income in Maine and A_X is the amount Xanadu spends on advertising. What is the income elasticity of demand for Xanadu textbooks when P_X = 100, P_Y = 80, M = 5000, and A_X = 2000?

Answer 1

Income elasticity of demand(e_M) is given by :

Here we have the following demand function :

Q^D_X  = 5000 – 4P_X + 3P_Y + 0.05M + 0.001A_X .

Also we have: P_X = 100, P_Y = 80, M = 5000, and A_X = 2000

=> Q^D_X  = 5000 – 4*100 + 3*80 + 0.05*5000 + 0.001*2000 = 5092

Hence, Income elasticity of demand for Xanadu textbooks = 0.049