(a) Output of the home firm is y = d(q, p, I). Use the fact that d(q, p, I) is homogeneous of degree zero in (q, p, I) to show that dqq+dpp+dII = 0. Then use the assumption that the income elasticity of demand is unity to show that dpp/d = (η–1). (b) Using (a), compute the total change in home output y = d(q, p, I) as p increases along the home reaction curve. Show that output increases if 0 2.

(a) Output of the home firm is y = d(q, p, I). Use the fact that d(q, p, I) is homogeneous of degree zero in (q, p, I) to show that dqq+dpp+dII = 0. Then use the assumption that the income elasticity of demand is unity to show that dpp/d = (η–1). (b) Using (a), compute the total change in home output y = d(q, p, I) as p increases along the home reaction curve. Show that output increases if 0 2.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter4: Estimating Demand

Section: Chapter Questions

Problem 7E

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