Answer to Question #165528 in Microeconomics for Elliot Bansah

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

i.                   Good Y is complementary good to good X because it shows that the good's demand is increased when the price of another good is decreased.

ii.                 Good Z is a Substitute good to Good X since an increase in price for good X leads to an increase in demand for good Z by 0.3.

iii.               Coefficient of Pz is +0.3 implying Substitute: A good with a positive cross elasticity of demand, meaning the good's demand is increased when the price of another is increased. Thus if the price for good X increases, the demand for good Z increases by 0.2

The coefficient of Px is -0.4, which own price elasticity; shows the responsiveness of quantity supplied to a change in price thus a change in the price of good X will lead to a decrease of demand by -0.2

the Coefficient of Py is -0.2, implying negative cross elasticity; shows the good's demand is increased when the price of another good is decreased, thus a decrease in the price of good X leads to an increase in demand for good Y.

The coefficient of M is 0.3, implying income elasticity; responsiveness of the quantity demanded a good to a change in consumer income thus an increase in income thus n increase in income will lead to a rise in demand for good X by 0.3.