Answer to Question #231226 in Macroeconomics for chris

Question

a) 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, Qz= Quantity of good z, Pz= the price of good z, Pa= the price of good a, Pb = the price of good b, Y = income i) Justify whether the law of demand is valid here. (5 marks) ii) Explain how goods a and b are related goods to good z. (5 marks) iii) Explain whether good z is a normal good? 

Answer 1

(i)As coefficient of Pz is negative, meaning a rise in price of good z will reduce the quantity demanded of z which shows the law of demand. A rise in price reduces quantity demanded.

(ii)Coefficient of Pa is positive meaning a rise in price of good 'a' will rise the quantity demanded of 'z' which means these goods are substitutes.

Coefficient of Pb is negative meaning a rise in price of good 'b' will reduce the quantity demanded of 'z' which means these goods are compliments.

(iii)Good 'z' is a normal good because it has a positive relationship with income.