Question

Which of the following is true for Beta Company with demand function for its product X, “QX = 1000 – 5PX - 0.03I + 0.2PY,” where QX = quantity of X sold, PX = price of X, I = consumers’ average income, and PY = price of product Y?

		a) X is an inferior good and a substitute to good Y.
		b) X is an inferior good, and a complement to good Y.
		c) X is a normal good, and a complement to good Y.
		d) X is a normal good, and a substitute to good Y.

Answer 1

Option a

X is an inferior good and a substitute to good Y.

An inferior good has an inverse relationship with income, from the demand curve the coefficient of the "I" is negative means increase in income decreases demand X. It means X is an inferior good.

Substitute goods have a positive relationship between the price of one and quantity of other, the coefficient of "PY" is positive means increase in the price of Y increases demand X, it means the goods are substitutes.