Answer to Question #145915 in Microeconomics for Snehal

Question

hello respected madam/sir
I am unable to solve the following question:
The demand curve for good A is given by
Q = a – bPA + cPB
a) Goods A and B are complements.
b) Goods A and B are substitutes.
c) Goods A and B are unrelated in consumption.
d) The demand curve for good A is upward sloping.

why is the answer b?
and

The demand curve for good A is given by
Q = a – bPA + cPB

a) The quantity of A purchased falls and the price of A falls.
b) The quantity of A purchased increases and the price of A increases.
c) The quantity of A purchased increases and the price of A falls.
d) The quantity of A purchased increases and the price of A stays the same.

why is the answer b?

I using this website for the first time. I hope to look for a response :)
Thanks and Regards
Snehal

Answer 1

Question 1

$\bold {Answer}$

b (the goods are substitutes)

$\bold {Solution}$

Since the demand function is for good A, it implies that the demand for good A is affected by the price of good B, price of good A, and other factors. Q is the quantity demanded for good A.

The coefficient, -b, shows that an increase in price of good A by $1 results in a fall in quantity demanded by b units.

The coefficient, +c, shows that if the price of good B increases by $1 unit, quantity of good A demanded increases by c units. Thus, there is a positive correlation between price of good B and quantity of good A demanded, which implies goods A and B have a positive cross elasticity of demand. The goods are therefore substitutes.

Question 2

$\bold {Answer}$

C, (The quantity of A purchased increases and the price falls)

$\bold {Solution}$

b cannot logically be the answer.

The negative coefficient, -b, on PA implies that the price of good A and its quantity demanded are negatively related, ceteris paribus. Quantity demanded and price are negatively related, and when price increases, quantity will decrease. When price decrease, quantity will increase, ceteris paribus.