Assume the following simple supply and demand model: Qd = a - bP + cY + dPr Qs =

Question

Assume the following simple supply and demand model:
Qd = a - bP + cY + dPr
Qs = eP - fw   where a,b,c,d,e,f all strictly positive and Pr is the price of a related good, P is the price of the good, Y is consumer income, and w is the wage rate.
Assume a supply and demand diagram with P measured on the vertical axis and Qd and Qs measured on the horizontal axis.
The sign of the derivative of Qd with respect to Pr suggests which of the following?

Select one:

a. The related good is a substitute

b. the related good is a complement

c. the related good is inferior

d. the related good is normal

e. none of the above

Explanation / Answer

The derivative of Qd with respect to Pr = dQd / dPr

Qd = a - bP + cY + dPr

dQd / dPr = d

Qunatity demanded and price of related good are directly realted i.e. if Price of related good increases, Quantity demanded of that good decreases but Quantity demanded of related good increases. It means the goods are substitutes.

a. The related good is a substitute

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