It is for Professor Kern

The 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.

First we must solve the function to get our first point in determining the price elasticity of demand. Qx=75-40-15 = 20.

Now, we need to find another point to display a delta. Suppose the price of Good X increased by 20%. The demand function value would now be Qx=75-2(24)-15= 12.

12-20 = -8. For a 20% increase in price, demand quantity falls by 8.

-8/20 x 1 = -40% decrease in demand.

Price elasticity of demand = -40/15 = -2 2/3. Since the value is less than -1, then the demand is said to be elastic.

To determine if Good Y is a substitute or complement to Good X, we can increase the price for Y by 60%. The demand function value would now be Qx= 75-2(20)-1.5(16) = 11

= (11-20)/20 = -45%

Cross Price of Elasticity would be written as =-(45/11)/(60/16)

The cross price of elasticity would = -1.09091

Good Y is a complementary to Good X because the value of the Exy is negative because an increase in Py led to a reduction in the quantity demanded of X.

 

1. How important is saving for a household and the economy? How much should be saved?

Saving is extremely important to a household, as well as the economy. People’s personal savings directly influences how much they are prepared for future economic events or emergencies. Putting money aside each pay period into savings accounts also helps the economy through the banking industry. The more people use bank savings accounts, the more money the bank has on hand to invest in businesses or purchase Treasury bonds. Those who choose to consume most or all of their income between paydays are stimulating the economy in a way, but are putting themselves in a bad situation personally. “According to the Life Cycle Income Hypothesis, income varies systematically (predictably) over the person’s lifetime” (Samavati, Adilov, & Dilts, 2013, p.48). When the US economy went south during 2008 and 2009, a lot people and businesses were affected. Some folks lost their jobs, had houses foreclosed on, and because some lived beyond their means and expected a paycheck, they were left with nothing. These times clearly changed attitudes toward saving money.

References

Samavati, H., Adilov, N., & Dilts, D. A. (2013). Empirical Analysis of the Saving Rate in the United States. Journal Of Management Policy & Practice, 14(2), 46-53. Retrieved from http://search.ebscohost.com.ezproxy.liberty.edu:2048/login.aspx?direct=true&db=bah&AN=89922139&site=ehost-live&scope=site