Question

Suppose the demand function for good X is given by:

Q_dx = 15 - 0.5 P_x - 0.8 P_y where Q_dx is the quantity demanded of good X, P_x is the price of good X, and P_y is the price of good Y, which is related to good X.
Using the midpoint method, if the price of good X is constant at $10 and the price of good Y decreases from $10 to $8, what is the price elasticity of demand for good Y? Is the demand elastic, unitary elastic, or inelastic?

Answer 1

Step-by-step explanation:

Q(8) =15 - 0.5 x 10 - 0.8 x 8 = 15-5-6.4=3.6

Q(10) =15 - 0.5 x 10 - 0.8 x 10 =15-5-8= 2

Cross Elasticity = -0.2 / 0.8 = -0.4