21 Jul WHAT CAN YOU SAY ABOUT GOOD X IF AM IS NEGATIVE?
. Suppose the demand for good X is given by Qd X = 10 +aXPX +aY PY +aMM. Good Y is a good that is so Show more . Suppose the demand for good X is given by Qd X = 10 +aXPX +aY PY +aMM. Good Y is a good that is somehow related to good X and M represents income. (a) What is the law of demand? Is there anything you can say about any of the aX aY aM coefficients as a consequence of the law of demand (b) Assume aY is positive. What can you say about how goods X and Y are related? Explain why that is the case. (c) What can you say about good X if aM is negative? After studying the demand function above and collecting some more data about your product you come to the conclusion that aY = 4 aM = 1 PY = $2.50 and M = $80. According to the economists at your firm the own price elasticity of demand is .25 when the price is $10. The supply function for this product is Qs X = 4PX 32. (d) Is demand elastic when PX = $10? Inelastic? If you increase the price of your product do you expect an increase or a decrease to your total revenue? (e) Show that the demand function for the parameters given above is Qd X = 100 2PX: (i) use the coefficients prices and income given to show that Qd X = 100 aXPX 3 (ii) use the elasticity when PX = $10 to determine aX (f) Graph the supply and demand functions. Highlight the consumer and producer surpluses areas. (g) What are the equilibrium price and quantity for this product? What is the total revenue for your company under these demand and supply functions? (h) Suppose government launches a new program that effectively sets a price floor for your product of $30. What happens in this case? Draw on the same graph from (f) what this price floor means. (i) In order to mitigate any loss of business you may incur the government offers to buy any product left at the floor price imposed in (h). How much should government expect to spend with this program? Show less
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