Suppose demand for good A is given by DA = 500 - 10 Pa + 2 Pb + 0.70I where Pa is the

price of good A, Pb is the price of some other good B, and I is income. Assume that Pa is

currently $10, Pb is currently $5, and I is currently $100.

a. What is the elasticity of demand for good A with respect to the price of good A at the

current situation? Interpret the nature of elasticity of demand.

b. If price of good A changes by 10% by how much percent would demand for the good

change?

c. Given your answer in part (a) and (b) above, would you suggest a price reduction or

increase to boost sales of good A?

d. What is the cross-price elasticity of the demand for good A with respect to the price of

good B at the current situation? What is the relationship between good A and B?

e. What is the income elasticity of demand for good A at the current situation and the

nature of the good?