Answer to Question #231137 in Economics of Enterprise for Ridzz

Question

A firm’s demand function for good Z is estimated as follows:

Qz = 4500- 1/8 Pz + 1/5 Pa – 1/9 Pb + 2Y

Where:

Pz is the price of good z,

Pa is the price of good a,

Pb is the price of good b, and

Y is income.

(i) Justify whether the law of demand is valid here.

Answer 1

Solution:

i.). The law of demand is valid in this demand equation since it shows an inverse relationship between the price of good z with its quantity demanded. That is, the quantity demanded varies inversely with the price. Therefore, at higher prices consumers will demand a lower quantity of good z, thus the law of demand.