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Exponential Demand Functions

1) The document presents an exponential demand function and shows that it exhibits constant elasticities of -1 for the price elasticity of demand and 1/2 for the cross price elasticity of demand. 2) It then expands the model to include 4 consumers (Pauper, Broke, Average, Rich) and derives the market demand function as the sum of individual demands. 3) Various price elasticities are then calculated for the market demand under different scenarios such as changes in price, income, taxes, or if goods become complements. All elasticities are shown to depend on the parameters of the demand function.

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Damini Thakur
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426 views19 pages

Exponential Demand Functions

1) The document presents an exponential demand function and shows that it exhibits constant elasticities of -1 for the price elasticity of demand and 1/2 for the cross price elasticity of demand. 2) It then expands the model to include 4 consumers (Pauper, Broke, Average, Rich) and derives the market demand function as the sum of individual demands. 3) Various price elasticities are then calculated for the market demand under different scenarios such as changes in price, income, taxes, or if goods become complements. All elasticities are shown to depend on the parameters of the demand function.

Uploaded by

Damini Thakur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Exponential Demand

Functions
The following demand function
is an exponential demand
function: 1

1
X C P
2

P Y2

Exponential Demand
Functions
This exponential
demand function
exhibits constant
elasticities:

X ,P x

1
X C P
2

1, e

X ,Py

1
X

PY

1
2

Problem 7.1, page 188


a. The market demand function for X is the
sum of the demands of the four participants:

i1

qi

i1

1
2

Ii P X PY

1
2

For i= 1 (Pauper),2 (Broke),3 (Average), and


4 (Rich).

1
2
Y

1
Q
2

1
1
I1 P X P
2

1
Q
2
le t

I1

I1

I2

I2

I3

1
2
Y

I3

I4 P

I4

1
X

1
2
Y

1
1
I3 P X P
2
1
X

16

th e n ,
1
Q cP
2

1
2
Y

1
1
I2 P X P
2

1
P * 2 3 * 1 * 1 1 1 .5
2

1
X

I4 P P

1
2
Y

1
2
Y

16

25

100 23

Price Elasticity of Demand


e
e

X , P

X , P

P X

c
2 P

P X
*
X
P
2
X

P
c

P
2 P

X , P

Cross Price Elasticity of


Demand
e

X , P

X , P

PY
X
*
PY
X
1
c
2
2 P X
PY

P
c

P
2 P

X , P

1
2

Income Elasticity of Demand


We can not
compute the
income elasticity of
demand for good X
without knowing
whose income has
changed.

x ,I

X
I

*
I
X

If price of X doubles:
1
2
Y

1
1
X cP X P
2
1
X * 23 * 2
2

*1

1
2

5 .7 5

If Mr. Pauper loses his job and


his income falls by 50%:
1
2
Y

1
1
X cP X P
2
c 8 16

25

1
1
X * 2 1 .8 3 * 1 * 1
2

1 0 0 2 1 .8 3
1
2

1 0 .9 1

If Ms. Richs income drops by


50%:
1
2
Y

1
1
X cP X P
2
c 16 16

25

1
1
X * 2 0 .0 7 * 1 * 1
2

1
2

5 0 2 0 .0 7
1 0 .0 4

If the government imposes a


100 percent tax on Y:
1
2
Y

1
1
X cP X P
2
c 16 16
1
1
X * 23 *1 * 2
2

25
1
2

100 23

1 6 .2 6

If IP=IB=IA=IR=25:
1
2
Y

1
1
X
cP X P
2
c 4 25 20
1
X
* 20 * 1
2

* 1

1
2

10

If IP=IB=IA=IR=25 and PX doubles:


1
2
Y

1
1
X
cP X P
2
c 4 2 5 2 0
X

* 2 0 * 2
2

* 1

1
2

If IP or IR drops by 50%:
1
1
X
c P X 1 P Y2
2
c
1 2 .5
25

* 1 8 .5 4 * 1
2

1
X
cP
2
c
25

1
X

25

* 1

1
2

2 5 1 8 .5 4

9 .2 7

1
2
Y

25

1
X
* 1 8 .5 4 * 1
2

25
1

* 1

1
2

1 2 .5 1 8 .5 4
9 .2 7

If Ms. Rich finds Z a necessary


complement to X:
1
2
Y

I R PY
1 1
X c P X P
2
2 PX PZ
c IP IB IA 16 16 25 13
1
2

1
100 *1
1
X *13 *1 *1
5 6 .5
2
2*1*1

Price Elasticity of Demand, ex,


Px

x ,P

PX
X

*
P X
X

c P

2 P

x ,P

x ,P

1
2
Y
2
X

I R PY
PX

2
1
2 P X PZ
c P Y2
I R PY

2 PX
2 PX PZ

Cross Price Elasticity of


Demand
e

x , PY

x , PY

x , PY

PY
X

*
PY
X
1
c P

2

2 P X

1
2
Y

I
2 P

c P Z 2 I R P
1

*
1
2
c P Z I R P Y2

1
2
Y

PY

R
Z

c P
2 P

1
2
Y
X

PY

2 P X P
R

Cross Price Elasticity of


Demand
e
e

X ,P

X ,P

X ,P

PZ
X

*
P Z
X
I R PY

2 *
2 P X P Z

P
c P
2 P

I R PY P
2 P X P Z2

c P

1
2
Y

1
2
Y

PZ I
2 P X PZ

I
2 P

R
X

c P

1
2
Y

Cross Price Elasticity of


Demand
e

, P

, P

c P

, P

I
I

1
2
Y

c P

P
1
2
Y

c P

1
2
Y

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