Question

The demand for beer in Japan is given by the following equation: Qd= 700−2P−PN+0.1I, where is P is the price of Beer, PN is the price of nuts, and I is the average consumer income.

a) What happens to the demand for beer when the price of nuts goes up? Increases or Decreases?

b) In which direction demand curve shifts? Right or Left?

c) Are beer and nuts demand substitutes or complements?

d) What happens to the demand for beer when average consumer income rises? Increases or Decreases?

e) In which direction demand curve shifts? Right or Left?

Answer 1

Let us fix the price price of bear be P = 10 and I 100 and Pn = 10 therefore quantity demanded of beer is 770.

Now suppose price of nuts goes up to 20 then quantity demanded is 760.

a) demand for beer decreases.

b) demand curve of beer will shifts towards left as at a same price of beer demand decreases.

c) Due to increase in price of nuts demand for beer decreases which implies they both are substitutes i.e. they are jointly demanded , now consumer are demanding less of beer. If the demand increases than they are complements .

d) When consumer income rises demand will increases as now consumer can afforf more beer at a given price.

e) Demand curve will shift towards right