4.

A firm has estimated the following demand function for its product (2 points):

Q = 8 - 2P + 0.10I + A

where Q is quantity demanded per month in thousands, P is product price, I is an index of consumer income, and A is advertising expenditures per month in thousands. Assume that P = $10, I = 120, and A = 10. Use the point formulas to complete the elasticity calculations indicated below.

(i) Calculate quantity demanded.

Q = 8 - 2*(10)+0,10*(120)*(10)

Q = 10

Quantity Demand/Month:Q= 10.000.

(ii) Calculate the price elasticity of demand. Is demand elastic, inelastic, or unit elastic?

E_P= a₁*(P/Q)

a₁= -2

P= 10

Q= 10

E_P= -2* (10/10)

E_P= -2

Demand = -2is elastic

(iii) Calculate the income elasticity of demand. Is the good normal or inferior? Is it a necessity or a luxury?

E_I= a₃*(I/Q)

a₃= 0.10

I= 120

Q= 10

E_I= 0,10*(120/10)

E_I= 1,2

The Good is normal, since income elasticity is <1 (higher than 1)

(iv) Calculate the advertising elasticity of demand.

E_A= a₅*(A/Q)

a₅= 1

A= 10

Q= 10

E_I= 1*(10/10)

E_I= 1