The general demand function for good A is Qd = 754 - 2 PA - 0.05M + 6PB + 10+ 3P

Question

The general demand function for good A is Qd = 754 - 2 PA - 0.05M + 6PB + 10+ 3PE + 2N where Qd = quantity demanded of good A each month, PA = price of good A, M = average household income, PB = price of related good B, = a consumer taste index ranging in value from 0 to 10 (the highest rating), PE = price consumers expect to pay next month for good A, and N = number of buyers in the market for good A.

a. Interpret the intercept parameter in the general demand function.

b. What is the value of the slope parameter for the price of good A? Does it have the correct algebraic sign? Why?

c. Interpret the slope parameter for income. Is good A normal or inferior? Explain.

d. Are goods A and B substitutes or complements? Explain. Interpret the slope parameter for the price of good B.

e. Are the algebraic signs on the slope parameters for , PE, and N correct? Explain.

f. Calculate the quantity demanded of good A when PA = $2, M = $60,000, PB =$24, = 7, PE = $12, and N = 12,000.

Explanation / Answer

Ans:

a) 600 units of good A can be sold every month if P, M, P B, F, Pe, and N are all at the same time equivalent to zero.

b)The slope parameter for a good’s own price must be negative because the law of demand stipulates
that quantity demanded and price of a good are inversely related.

estimation of the slant parameter is = - 4

c)

The slope parameter on M (-0.03) indicates that a $1 increase in average household income, all else constant, will decrease sales of good A by 0.03 units per month. Or a $1,000 increase in M will decrease Qd by 30 units per month. Good A is an inferior good because the slope coefficient on M is negative.

d)

Complements. The slope parameter on PB is negative. A $1 increase in the price of good B, all other factors constant, will cause the quantity demanded of good A to decrease by 12 units per month.

e)

These three slant slope parameters if all be certain, since each of the variables shifts specifically (as opposed to contrarily) with amount requested. For tastes, take note of that the slant parameter e (=15) is not limited to the scope of 1 to 10 similar to the estimation of the taste list F.

f)

Qd = 600 – 4PA – 0.03M – 12PB + 15 F + 6Pe + 1.5N

Qd = 600 – 4*5 – 0.03*25,000 – 12*40 + 15*6.5 + 6*5.25 + 1.5*2,000

Qd = 2,479 units of good A per month

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