Question

Please assist in the following:

Demand, Supply, and Market Equilibrium   

Q1. The general demand function for good A is

Q_d = 754 + 2P_A - 0.05M + 6 P_B + 10 T + 3 P_E + 2N

where Q_d = quantity demanded of good A each month, P_A = price of good A, M = average household income, P_B = price of related good B, T = a consumer taste index ranging in value from 0 to 10 (the highest rating), P_E = 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. (1 point)

b. What is the value of the slope parameter for the price of good A? Does it have the correct algebraic sign? Why? (1 point)

c. Interpret the slope parameter for income. Is good A normal or inferior? Explain. (1 point)

d. Are goods A and B substitutes or complements? Explain. Interpret the slope parameter for the price of good B. (1 point)

e. Are the algebraic signs on the slope parameters for , P_E, and N correct? Explain. (1 point)

f. Calculate the quantity demanded of good A when P_A = $2, M = $60,000, P_B =$24, = 7, P_E = $12, and N = 12,000. (2.5 point)

Answer 1

a. The intercept parameter indicates that 754 units of good A can be sold each month if PA, M, PB, T, PE and N are all equal to zero.

b. PA= +2

Therefore value of slope parameter for the price of good A is +2. It does not have a correct algebric sign because the law of demand states a negative realtion between price and quantity demanded and here + sign shows positive relation.

c.The slope parameter of good A is -0.05. Good A is an inferior good because for every $1 increase in income, the consumer demands 0.05 units less.

d. The slope parameter for the price of good B = +6. which is Positive. It indicates that good A and good B are substitutes. With the increase in price of good B, quantity demanded for A will increase.

e. Yes, The algebric signs for PE and N are correct. Both share a positive relation with quantity demanded. If they expect a rise in price of good A next month, they will demand good A more now. Similarly more the number of consumers , more will be demand for good A.

f.  Q_d = 754 + 2P_A - 0.05M + 6 P_B + 10 T + 3 P_E + 2N

= 754 + 2*2 - 0.05*60000 + 6*24 +10*7 + 3*12 + 2*12000

= 754 + 4 - 3000 +144 + 70 + 36 + 24000

= 22008 units of good A