1. The monthly general demand function for Product A is give as Qd = 600 – 4P A

Question

1. The monthly general demand function for Product A is give as Qd = 600 – 4PA + 0.03M -12PB + 15T +6Pe + 1.5N, where PA is the price of product A itself, M is income, PB is the price of a related good, T is Taste, Pe is the expected future price, and N is the number of buyers. Given the coefficient of the income variable M, product A would be classified as which of the following kind of good?

2. The monthly general demand function for Product A is give as Qd = 600 – 4PA - 0.03M -12PB + 15T +6Pe + 1.5N, where PA is the price of product A itself, M is income, PB is the price of a related good, T is Taste, Pe is the expected future price, and N is the number of buyers. Given the coefficient of the income variable M, product A could not be classified as which of the following kind of good?

Explanation / Answer

1. Qd = 600 - 4PA + 0.03M - 12PB + 15T + 6Pe+ 1.5N

The above function clearly shows that there is direct relationship between income of the consumer and quantity demand of Product A. This depicts that when income of consumer increases then demand of Product A increases.

So, Product A is a normal good because goods who have positive income effect are normal goods.

2. Qd = 600 - 4PA - 0.03M - 12PB + 15T + 6Pe+ 1.5N

The above function clearly shows that there is inverse relationship between income of the consumer and quantity demand of Product A. This depicts that when income of consumer increases then demand of Product A decreases.

So, Product A is an inferior good because goods who have negative income effect are inferior goods. Therefore, Product A could not be normal good.

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