A simple linear demand function may be stated as Q = a - bP + cI where Q is quantity demanded, P is the product price, and I is consumer income. To compute an appropriate value for b, we can use observed values for Q and P and then set -b(P/Q) equal to the:
A) income elasticity of demand.
B) cross-price elasticity of demand.
C) price elasticity of demand.
D) price elasticity of supply.

Question

Quizplus · Accepted Answer

The expression -b(P/Q) is the formula for price elasticity of demand, which measures the responsiveness of quantity demanded to changes in price. Therefore, setting -b(P/Q) equal to the observed value of price elasticity of demand will give us the appropriate value for b in the demand function.

A Simple Linear Demand Function May Be Stated as Q