Question

You have computer a market demand curve for X and it looks like this:

                Q_X^d = 30,000 -20P_X - 8P_Y + 0.5M

                where P_Xis the price of X

                                P_Y is the price of a related good Y

                                M is the income of the buyers in the market.

    What can you say about the demand from good X from this demand curve?

Answer 1

Looking at the demand function, it can be inferred that good Y is a substitute od good X as both P_x​ and P_y ​have the same signs. This means an increase in price of Y leads to a fall in qty demanded of X and vice versa. Also good X is a normal good and has very high elasticity. This can be seen as an increase in price of X leads to a fall in the quantity demanded of X which is the case of a normal good. It can be said it is highly elastic change, as a unit change in price leads to a 20 times fall in quantity. The good is also very income elastic. This can be seen, as an unit increase in income leads to a 0.5 increase in the quantity demanded of Y.