Answer to Question #165442 in Microeconomics for Benedictus

Question

Demand function for a normal good X is given as

Qdx = 4 – 0.4Px – 0.2Py + 0.3Pz + 0.3M

where Qdx is quantity demanded for good X, Px is price of good X, and 

are 

prices of related goods, and M is income. Y is good Y and Z is good Z.

i. What type of good is Y? Explain your answer. 

ii. What type of good is Z? Explain your answer. 

iii.Interpret the coefficients of Px, Py, Pz, and M. 

Answer 1

Y is a substitute good since its coefficient in the demand function is negative.

Z is a product that complements the back good since its coefficient is positive and increases demand.

With an increase in the price of goods x and goods y, demand decreases by 0.4 and 0.2 of the new price, respectively.

With an increase in the price of commodity z, the demand for commodity x increases by 0.3 for each new price level z.

With an increase in income, the demand for product x increases by 0.3 for each new level of income M.