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