Answer to Question #165615 in Microeconomics for Isaac Owusu

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, Py and Pz 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

The demand equation is:

$Qdx =4–0.4Px –0.2Py +0.3Pz +0.3M$

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

Good Y is a complement to good X since the demand for X decreases with an increase in the price of good Y.

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

Good Z is a substitute to good X since the quantity demanded of X increases with an increase in the price of Z.

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

• Holding all the other factors constant, the quantity demanded for good X will decrease by 0.4 units when the price of X increases by one unit.
• Holding all the other factors constant, the quantity demanded of good X will increase by 0.3 units when the price of good Z increases by one unit.
• Holding all the other factors constant, the quantity demanded of good X will decrease by 0.2 units when the price of good Y increases by one unit.
• Holding all the other factors constant, the quantity demanded of good X will increase by 0.3 units when the income M increases by one unit.