What is the advertising elasticity of demand for good x?

Question

Suppose demand is given by
Q xd = 50 - 4Px + 6Py + Ax ,
where Px = $4,
Py = $2, and
Ax = $50.


What is the advertising elasticity of demand for good x?
a) 1.12.
b) 0.38.
c) 1.92.
d) 0.52.

Answer 1

d) .52

Elasticity of demand, put simply, is how we react to changes in prices. Typically, if the product is needed, then the demand is inelastic, and we are not affected by price changes. Other times we have more sensitivity to changes in prices and demand is more elastic.

You can measure demand elasticity by dividing the change of demand by the change in price, or delta Qxd/delta Ax. In this example, just solve for Qxd with Ax of $50 and again for, say, $100.
Note: (1) and (2) are usually written as subscripts.

Axd(1)=50
Axd(2)=100
Qxd(1)=50-4(4)+6(2)+50=96
Qxd(2)=50-4(4)+6(2)+100=146

delta Qxd=(Qxd(1)-Qxd(2))/Qxd(1)
delta Ax=(Ax(1)-Ax(2))/Ax(1)

delta Qxd/delta Ax

(96-146)/96
--------------- = .0520833
(50-100)/50

Answer 2

$15