Question

Qd = 600 – 4p – 0.03M – 12 Pr + 5T + 6Pe + 1.5N Where Qd = quantity demanded for commodity A; P = price of commodity A; M = consumer's income, Pr = price of related commodity (good ‘B'), T = consumer's taste, Pe = expected price of commodity A, N = number of buyers in the market. A. Interpret the intercept parameter in the generalized 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? 4. Yes since indirectly proportional. C. Interpret the slope parameter for income for income. Is good ‘A' normal or inferior? Explain. 0.03. Since Em less than 1 it is normal goods d. Are goods A and B substitutes or complements? Why? Interpret the slope parameter for the price of good B. E. Are the algebraic signs on the slope parameters for T, Pe, and N correct? Explain f. Calculated the quantity demanded for good ‘A' when P = $15, M = $25000, Pr = $40, T = 6.5, Pe = $5.25 and N = 2000? [PU 2011 spring]

Answer 1

Answer:

A. It implies a fixed 600 units of commodity A will always be demanded without being influenced by any factor that determine the quantity demanded for good ‘A'.

B. 4. Yes.  The reason is that the price of good A is indirectly proportional to the quantity demanded for good ‘A'.

C. It implies that the quantity demanded for good ‘A' decreases by 0.03 as the consumer's income increases by $1. It is an inferior good.

d. Goods A and B are complements since the negative sign implies that the quantity demanded for good ‘A' decreases as the  price of related commodity (good ‘B') (Pr) increases. The interpretation of the the slope parameter for the price of good B is that the quantity demanded for good ‘A' decreases by 12 units as the price of related commodity (good ‘B') (Pr) increases by $1.

E. Yes, the algebraic signs on the slope parameters for T, Pe, and N are correct. The reason is that quantity demanded for good ‘A' will increase as each of T, Pe, and N increases.

f. Quantity demanded for good ‘A' is 2,374.

Explanation:

A. Interpret the intercept parameter in the generalized demand function.

In the generalized demand function, 600 represents the Interpret the intercept parameter.

This implies that 600 units is a fixed units of commodity A is demanded and this is not affected by any factors that determines the quantity demanded for good ‘A'.

Therefore, it implies 600 units of commodity A will always be demanded.

B. What is the value of the slope parameter for the price of good A? Does it have the correct algebraic sign? Why? 4. Yes since indirectly proportional.

From the generalized demand function, the value of the slope parameter for the price of good A is 4.

Yes, it has a the correct algebraic sign which is a minus sign.

The reason is that the price of good 'A' is indirectly proportional to the quantity demanded for good ‘A'.

C. Interpret the slope parameter for income for income. Is good ‘A' normal or inferior? Explain. 0.03. Since Em less than 1 it is normal goods

The slope parameter for income (M) is -0.03. This implies that the quantity demanded for good ‘A' decreases by 0.03 as the consumer's income increases by $1.

It is an inferior good because the quantity demanded for good ‘A' decreases as the consumer's income increases.

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

Since the slope parameter for price of related commodity (good ‘B') (Pr) is negative (i.e. –12), this implies that goods A and B are complements.

The negative sign implies that the quantity demanded for good ‘A' decreases as the  price of related commodity (good ‘B') (Pr) increases.

The interpretation of the the slope parameter for the price of good B is that the quantity demanded for good ‘A' decreases by 12 units as the price of related commodity (good ‘B') (Pr) increases by $1.

E. Are the algebraic signs on the slope parameters for T, Pe, and N correct? Explain

Yes, the algebraic signs on the slope parameters for T, Pe, and N are correct.

The reason is that quantity demanded for good ‘A' will increase as each of T, Pe, and N increases. This implies that there is a positive relationship between the quantity demanded for good ‘A' and each of T, Pe, and N.

f. Calculated the quantity demanded for good ‘A' when P = $15, M = $25000, Pr = $40, T = 6.5, Pe = $5.25 and N = 2000?

Given;

Qd = 600 – 4p – 0.03M – 12 Pr + 5T + 6Pe + 1.5N ............... (1)

Each of the value is then substituted into equation (1) and we then calculate as follows:

Qd = 600 - (4 * 15) - (0.03 * 25000) - (12 * 40) + (5 * 6.5) + (6 * 5.25) + (1.5 * 2000)

Qd = 2,374