2. (18 points) The demand edq uation for a firm\'s product is:-500-30P 2PA +041

Question

2. (18 points) The demand edq uation for a firm's product is:-500-30P 2PA +041 V" is quantity of the firm's product demanded "P" is price per unit of the firm's product "PA is price per unit of another firm's product, Good A T is average daily income of buyers of the firm's product Where Currently, P is 15, PA is 10, and I is 5000 a) Calculate the income elasticity of demand for the firm's product and put it here: (You must show your calculations to receive any credit for your answer) The firm's product is a complement to Good A The firm's product is a substitute to Good A b) Which of these is correct? (Check one) EXPLAIN your answer in at least one very clear, content-rich sentence using concepts and terminology (Credit for part (b) of question 2 depends almost entirely on your explanation.)

Explanation / Answer

2. Q = 500 - 30P - 2PA + 0.04I

Q = 500 - 30(15) - 2(10) + 0.04(5000)

Q = 500 - 450 - 20 + 200 = 230 units

a) Income Ed = Income/Quantity x dQ/dI = 5000/230 x 0.04 = 0.87

b) Increase in price of A i.e. PA causes decrease in quantity demanded of firm's product as coefficient of PA is negative. It means good A and firm's product are complementary goods.

So, true statement is The firm's product is a complement of Good A.

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