(3)Assume that the behavior of a typical consumer and a typical producer of comm

Question

(3)Assume that the behavior of a typical consumer and a typical producer of commodity X can be described by the following demand and supply curves Odx=220-4Ps + 0.751-0.25Py Qsx20 +2Px + 2.5Tc - 3.5C where I = consumer income Py price of commodity Y ; a related Te = an index of technology for C = an index of total cost of production commodity to commodity X producing commodity X (a)Comment on the behavior of the consumer and the law of demand in this market (b)Does the behavior of the firm conform to the law of supply in the market for commodity X? Explain (c)If the price of X is $5 and the price of Y is $10 find the income elasticity of demand for this product. Is this product a luxury? A necessity? An inferior good? (d)Explain the relationship between commodity X an

Explanation / Answer

A) Since there exists a negative relationship between demand for X and its price, it means that the law of demand holds true.

B) Since there exists a positive relationship between supply of X and its price, it means that the law of supply holds true.

C)

First find value of Qdx by substituting values of px and This gives Qdx = 197.5 + 0.75I

Income elasticity of demand = (dQ/dI)(I/Q) = 0.75I/197.5+0.75I

Since elasticity value is positive, it means increase in income increases demand for good, it means good is normal.

D)

Goods are complementary goods because there exists a negative relationship between price of Y and demand for X

E)

As technology improves, supply increases (due to positive relationship between the two)

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