5. The demand for good X is estimated to be QXd = 10,000 - 4PX + 5PY + 2M + AX where PX is the price of X, PY is the price of good Y, M is income and AX is the amount of advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000 units. Determine 1. a. Own price elasticity of demand b. Cross price elasticity of demand c. Income elasticity of demand d. Is good y a complement or a substitute e. Is good is normal or inferior

We need to calculate quantity demanded of good X

Qxd = 10,000 − 4PX + 5PY + 2M +
AX

Qxd = 10,000 − 4(50) + 5(100) + 2(25000) + 1000  

Qxd  = 10,000 - 200 + 500 + 50000 + 1000

Qxd  = 61,300

a. E(P) = ∆Qx/∆Px * (Px / Qx)

E(P) = - 4 * (50 / 61,300)

{where, ∆Qx/∆Px is the price coefficient = -4}

E(P) = = - 0.003    (The absolute value is 0.003)

Demand is inelastic, because price elasticity is less than 1.

b. CPED = ∆Qx/∆Py * (Py / Qx)

CPED = 5 * (100 / 61,300)

[where, ∆Qx/∆Py is the price coefficient of good Y = 5]

CPED = 0.008

c. IED = ∆Qx/∆M * (M / Qx)

= 2 * (25,000 / 61,300)

[where, ∆Qx/∆M is the income coefficient = 2]

= 0.816

d. Good Y and X is subtitles because  CPED is positive.

e. Good X is a normal good because income elasticity is positive.

in 2001, dell computer became the world’s largest personal computer vendor, continuing to

gain market share and post profits in an industry struggling with slumping sales and billions of

dollars in losses. dell sells 90% of its pcs directly to the final customer, largely bypassing the

reseller channel that accounts for most of the world’s pc sales. this direct customer relationship

is the key to dell’s business model, and provides distinct advantages over the indirect sales

model. dell’s direct relationship with the customer allows it to tailor its offerings to customer

needs, offer add-on products and services, and use the internet to offer a variety of customer

services. in addition, dell’s pcs are built to customers’ specifications upon receipt of an order,

giving dell additional advantages over indirect pc vendors who must try to forecast demand and

ship products based on those forecasts. dell’s direct sales and build-to-order model has achieved

superior performance in the pc industry in terms of inventory turnover, reduced overhead, cash

conversion, and return on investment (kraemer, et al., 2000).

explanation:

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