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Demand Function Calculation

The demand function for good X is: Qx = 300 - 30Px - 0.01 I + 15 Py - 4 Pz Good X is an inferior good based on its negative income elasticity. Good X and Y are substitutes based on the positive cross price elasticity. Good X and Z are complements based on the negative cross price elasticity. If income is $10,000, Py is $2, and Pz is $20, the demand function is: Qx = 150 - 30Px. The price of X is $5 if Qd is 0, $0 if Qd is 150, and $2 if Qd is 90. If Py increases to $10, the new

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46 views

Demand Function Calculation

The demand function for good X is: Qx = 300 - 30Px - 0.01 I + 15 Py - 4 Pz Good X is an inferior good based on its negative income elasticity. Good X and Y are substitutes based on the positive cross price elasticity. Good X and Z are complements based on the negative cross price elasticity. If income is $10,000, Py is $2, and Pz is $20, the demand function is: Qx = 150 - 30Px. The price of X is $5 if Qd is 0, $0 if Qd is 150, and $2 if Qd is 90. If Py increases to $10, the new

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debasis
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The BJC Company has the following demand function: Qx = 300 - 30Px - 0.

01 I + 15 Py - 4 Pz
a. Based on the demand curve, is the product X normal or an inferior good? Explain b. Based on
the demand curve, what is the relationship between good X and Good Y? Explain c. Based on the
demand curve, what is the relationship between good X and Good Z? Explain d. What is the
equation of the demand curve is consumer incomes are $10,000, the price of good Y is $2, and
the price of good Z is $20 e. What is the price of Good X if Qd is 0 or 150 or 90 f. What is the
Qd of this company if Px is $1, $3 and $4 g. If the price of good Y foes up to $10, what will be
the new demand equation for the Company?
Ans: Qx = 300 - 30Px - 0.01 I + 15 Py - 4 Pz
a. Differentiating w.r.t I, we get ,
dQx/ dI = -0.01
So the income elasticity of demand, EI = -0.01*(I/Qx) <0. When income elasticity is negative,
then it implies it is an inferior good.
b. Differentiating w.r.t Py, we get, dQx/ dPy= 15
So cross price elasticity of X w.r.t Y is Exy = 15*Py/Qx >0 ( as both Py and Qx must be
positive). When cross price elasticity of demand is positive, then good are substitutes, hence X
and Y are substitutes.
c. Differentiating w.r.t Pz, we get, dQx/ dPz= -4
So cross price elasticity of X w.r.t Z is Exz = -4*Pz/Qx <0. When cross price elasticity of
demand is negative, then goods are compliments, hence, X and Z are complements.
d. What is the equation of the demand curve is consumer incomes are $10,000, the price of good
Y is $2, and the price of good Z is $20
Qx = 300 - 30Px - 0.01 I + 15 Py - 4 Pz ; I = $10, 000, Py=$2, Pz= $20
So the demand curve becomes, Qx= 300-30Px -0.01*10,000+15*2-4*20
Or, Qx= 300-30Px 150= 150-30Px
e. What is the price of Good X if Qd is 0 or 150 or 90 ?
If Qd=0, then, 0= 150-30Px, or, 30Px=150 or, Px=5
If Qd=150, then, 150= 150-30Px , or, 30Px=150-150 or, 30Px=0 or, Px=0
If Qd=90, then, 90= 150-30Px or 30Px=150-90 0r, 30 Px=60 or, Px=2

f . What is the Qd of this company if Px is $1, $3 and $4


Px= 1, Qd= 150-30*1= 120
Px= 3, Qd=150-30*3=60
Px= 4, Qd= 150-30*4= 30
g. If the price of good Y goes up to $10, what will be the new demand equation for the
Company?
So, in new situation we have Qx = 300 - 30Px - 0.01 I + 15 Py - 4 Pz ; I = $10, 000, Py=$10, Pz=
$20
So the demand curve becomes, Qx= 300-30Px -0.01*10000+15*10-4*20
Or, Qx=300-30Px -30 =270-30Px

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