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(a) Describe clearly the three concepts of elasticity of demand. Use appropriate examples and diagrams to support your answer.

(b) Consider you have been appointed manager of a chocolate company. How far can you use these concepts to maximise revenue? Illustrate your reasoning, with the help of appropriate examples and diagrams.

The daily demand for ABC shoes is estimated to be as follows:-

Qx = 100 - 3Px + 4Py - 0.01M + 2Ax

Where Ax represents the amount of advertising spent on shoes (X), P is the price of good X, Py is the price of good Y and M is the average income. Suppose good X sells at $25 pair, good Y sells at $35, the company utilises 50 units of advertising and average consumer income is $20,000. Calculate and interpret the price, cross and income elasticities of demand.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M9585288

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