Running head: DB 2
Discussion Board Forum 2
Donovan Klein
BUSI 620
Liberty University
1) The demand function for Good X is defined as Qx = 75 - 2Px - 1.5Py, where Py is the
price of Good Y. Calculate the price elasticity of demand using the point formula for Px =
20 and Py = 10. Determine whether demand is elastic, inelastic, or unit elastic with respect
to its own price and whether Good Y is a substitute or a complement with respect to Good
X.
Qx = 75 - 2Px - 1.5Py
Sub in Px = 20 and Py = 10:
Qx = 75-40-15 = 20
To find the price elasticity of demand, we need another point. Therefore, let Px increase by 15%
Qx= 75-46-15= 14
-6/20 x 100% = -30%
Therefore the price elasticity of demand = -30/15 = -2
Since the price elasticity of demand < -1, the demand is elastic.
Let Py increase by 50% = 15
Qx= 75 - 2(20) - 1.5(15) = 12.5
% change in Qx = - (20-12.5)/20 x 100% = -37.5%
Finding XED = (-37.5/12.5) / (50/15) = -0.9
Therefore since the XED is negative, Good Y is a complementary good.
5) How important is saving for household and the economy? How much should be saved?
In recent years, there have been an increase in households facing one or more family members
with job loss as a result of economic downturn. Many families as a result have had to adjust their
way of living to meet the demands of a single income budget. However, even those families who
were able to make adjustments to reflect the loss of income as a result of remaining a single
income households or as a result of pay cuts, the ability to do so is often significantly linked to
the amount of emergency savings they have in place prior to these events.
The question of how much should be saved in an emergency fund is one with a variety of
answers depending on the individual begin asked. For instance, according to Alford (2014),
Thakor and Kedar recommend a couple set aside a minimum of 5% of their gross income (pre-
tax income) in an emergency fund. They also recommend having this emergency fund in place
before paying down any debt more than the minimum monthly payment requirements. Alford
also mentions Suze Orman’s recommendation of having a minimum of 8-12 months of living
expenses saved in an emergency fund.
Dave Ramsey (2014), a popular Christian finance expert, has an entirely different answer
to this question. His recommendation is to set aside a fund specifically for an emergency, like job
loss, medical expense, car repair, etc. The initial investment into this emergency fund he calls a
“baby emergency fund” which should be $1,000. Once this step is established, Ramsey
recommends then beginning to reduce debt. The intent of this fund is to help keep life’s
emergencies from becoming new debt. However, the goal is to continue to contribute to this
emergency fund until it then reaches a minimum of 3-6 months of a family’s personal expenses
to act as a buffer against unforeseen life events. Only after this emergency fund reaches 3-6
months of expenses should a family then seek to invest any “extra” money.
References
Alford, C. (2014). Couples and money: How much should we save in an emergency
fund?.GoGirl Finance. Retrieved from http://gogirlfinance.com/money/couples-and-
money-how-much-should-we-save-in-an-emergency-fund
Ramsey, D. (2014). What is an emergency fund?. Retrieved from http://www.daveramsey.com
