Question

0. Suppose the demand function for good X is estimated to be Qdx = 1000 – 25Px + 10Py + 100M, where Qdx is quantity demanded of X, Px is the price of good X, Py is price of some other good Y, and M is the average income of consumers. By examining this function, we can say good X has a downward sloping demand curve, is a substitute with good Y, and is a normal good.

Answer 1

Since the coefficient of the price of x is negative, the increase in the price of x by one unit decreases the quantity demanded by 25 units. This means that the quantity demanded and the price are negatively related and the demand curve is downward sloping. However, the demand for x increases by 10 units as the price of y increases by one unit, therefore good y is substituted with good x as price of good y increases, therefore good x is substitute with y. The demand for good x increases by 100 units as income M increases by one unit meaning that more of x is demanded with rise in income, indicating it is a normal good.