Given the Following Demand Function

question 11

Essay

Given the following demand function:
Q = 2.0 P^-1.33 Y^2.0 A^.50
where Q = quantity demanded (thousands of units)
P = price ($/unit)
Y = disposable income per capita ($ thousands)
A = advertising expenditures ($ thousands)

determine the following when P = $2/unit, Y = $8 (i.e., $8000), and A = $25 (i.e., $25,000)

(a) Price elasticity of demand
(b) The approximate percentage increase in demand if disposable income percentage increases by 3%.
(c) The approximate percentage increase in demand if advertising expenditures are increased by 5 percent.

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Definitions:

Book Depreciation

The method used by businesses to allocate the cost of a physical asset over its useful life for accounting and tax purposes.

Tax Rate

The percentage at which an individual or corporation is taxed, often varying by income or profits.

Income Taxes Payable

The amount of income tax a company owes to the government but has not yet paid.

Book Income Before Income Tax

The income reported in financial statements before the effect of income taxes, reflecting the financial performance from core operation and non-operational activities.