Question

Given the following model: Quantity of good sold = -1 * price of good + 2...

Given the following model: Quantity of good sold = -1 * price of good + 2 * income of consumer + 5 * price of related good + 50 * advertising spending promoting good

a. Is this a supply or demand relationship? Explain why.

b. Is this good a normal or inferior good? Why?

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Homework Answers

Answer #1

Ans) This is a demand relationship.

Since quantity of the good is negatively related to the price of the good, the equation is a demand equation. Increase in the price of good decreases the quantity demanded of the good. Decrease in the price of good increases the quantity demanded.

Ans) This good is a normal good.

The quantity of the good is positively related to the income, the good is normal. When income increases, the quantity demanded increases. When income decreases, the quantity demanded decreases.

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