11. Suppose the demand function for good x is as follows: Qd=1000-4Px-2Py-6M+3A,
ID: 1137922 • Letter: 1
Question
11. Suppose the demand function for good x is as follows: Qd=1000-4Px-2Py-6M+3A, where Px is the price for good X, Py is the price for good Y, M is income, and A is the amount the firm spends in advertising for good X. Based on this information we know that good x is…
A) Normal Good and a Substitute for good Y
B) Normal Good and a Complement for good Y
C) Inferior Good and a Substitute for good Y
D) Inferior Good and a Substitute for good Y
12. Assume a firm has a straight, downward sloping inverse demand curve. When the firm’s marginal revenue is negative, the demand for the good is Elastic.
13. If a firm sells a good with price elasticity of demand -0.6 and it increases its selling price, the firms total revenue from the sale that good will decrease.
14. Assume the cross price elasticity of demand between X and Y is -3. If the price of the good Y decreases by 5%, then the quantity demanded for good X will __________ by __________.
Explanation / Answer
11.
The good x is an inferior good as the coefficient of M is a negative no. This means that an increase in M will decrease the quantity consumed. The quantity demanded for X and income are inversely related. Also coefficient of Py is negative means that due to an increase in price of goog y there will be fall in demand for X showing the two goods are complements.
The relationship can be taken otherwise too. That is a decrease in income will lead to more of the quantity demanded. This type of characterstic is present in inferior good. The demand falls with rise in income and vice versa. The decrease in price of complement will lead to increase in demand for the concerned good. The decrease in price of gasoline will lead to increased demand for gasoline based cars.
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