Question

Reminder: Qd = 300 – 0.5Pi – 2Pp + 0.4Y. The income (Y) equals $500 and the price of a pen (Pp) is equal to $50. For the following questions, suppose that Pi = 200 II. (a) Compute the income elasticity. (b) Interpret your result (what does the number you just found mean?). (c) Is insulin a normal good or an inferior good? Why?

III. (a) Compute the cross-price elasticity of demand. (b) Interpret your result (what does the number you just found mean?). (c) Are the two goods complements or substitutes? Why?

IV. (a) Compute the price elasticity of demand. (b) Interpret your result (what does the number you just found mean?). (c) Is the demand elastic or inelastic? Why?

V. Lilly’s CEO states that “our vision is to change patients’ expectations – to provide a new sense of hope for people suffering from some of the world’s most debilitating diseases.” This vision probably explains why the firm increased the price of insulin by 800 percent between 1997 and 2017. Based on the price elasticity computed in the previous question

(IV), is a price increase a good or a bad strategy to increase the firm’s revenue? Why or why not?

Answer 1