You are given the following equation for the market demand function for product X:
Where QD=quantity of X demanded per year
Px=price per unit of product X
I=average income per year
Py=price per unit of product Y
a) Is X a superior (normal), neutral or inferior good? Why?
b) Is Y a substitute for, complement to, or independent of, X? Why?
c) What Px causes the demand for X to fall to zero?
d) How much X would the market demand if X was given away for free?
e) What must Px be if 50 units of X are to be sold per time period?
f) Suppose Px =10. What is the price elasticity of demand for X?
a) Coefficient of I is 0.002. It is a positive value. It means that for every increase of a dollar in income, demand will increase by 0.002 units. Since consumption of X is increasing with increases in income, we can say that X is a normal good.
Solution predicts the nature of the good in consideration and related good with the help of given demand equation. It also estimates the quantity demanded at given prices. At last it depicts the steps to calculate the price elasticity of demand.