Question

The demand for video recorders has been estimated to be QV = 145 - 3.2Pv +7M - .95Pf -39PM, where Qv is the quantity of video recorders, PF denotes the price of video recorder film, Pm is the price of attending a movie, PV is the price of video recorders, and M is income. Based on the estimated demand equation we can conclude:

A. Video recorders are normal goods B. Video recorder are normal goods and demand for video recorders is inelastic C. The demand for video recorders is inelastic D. Video recorders are normal goods and video recorder film is a complement for video recorders A and C A and B

Answer 1

Answer

The demand for video recorders is;

Qv = 145 - 3.2Pv + 7M - .95Pf - 39Pm......(1) ,where,

Qv = quantity of video recorders,

Pf = price of video recorder film,

Pm = price of attending a movie,

Pv = price of video recorders,

M = income

Let us differentiate equation(1) with respect to Pv, keeping other variables constant,

d(Qv) / d(Pv) = - 3.2

Or, | d(Qv) / d(Pv) | = |- 3.2|

d(Qv) / d(Pv) = 3.2

From above, we see that the quantity demanded of video recorders changes more than the change in its price, i.e., the change in video recorder price has a large impact on the quantity demanded of video recorders. That's why the value of 'd(Qv) / d(Pv)' is greater than '1'. Thus we can conclude that the demand for video recorders is elastic.

Now, let us differentiate equation(1) with respect to M, keeping other variables constant,

d(Qv) / dM = 7

From above, we see that the income and quantity demanded of video recorders are positively related or move in same direction. Thus we can conclude that video recorders are normal goods.

Now, let us differentiate equation(1) with respect to Pf, keeping other variables constant,

d(Qv) / d(Pf) = - .95

From above, we see that the price of video recorder film and quantity demanded of video recorders are negatively related or they move in opposite direction. Thus we can conclude that, video recorder film is a complement for video recorders.

Thus, based on the estimated demand equation we can conclude:

D. Video recorders are normal goods and video recorder film is a complement for video recorders.

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