Question

a.Define the demand function of a good.

b.Discuss the price elasticity of demand for a necessity good, such as rice or bread.

c.Suppose that the government wants to maximize tax revenue. Explain why it may be not a good idea for the government to raise tax rates for a good with a price elasticity of demand more than one.

Answer 1

a. Define the demand function of a good.

Answer : Demand function can be explained as a mathematical equation which shows the demand of a good and service as a function of price of that good and service and other factors that influence the quantity demanded of that good and service such as taste and preference of the consumer, income, price of related goods etc... In short it express the relationship between quantity demanded and factors that effect quantity demanded of a good. Here quantity demanded is the dependent variable and factors like price, income etc are independent variables in the function.

The demand function of commodity Xcan be written mathematically as,

Q_d (X)= f (P_x, Py_, T, Y )

Q_d = Quantity demanded

P_{x =} Price of X

P_{y =} Price of related good

Y = Income of the consumer

T = Taste and preference of consumer