Q1. Suppose demand function for good x is estimated to be Qx = 8000 – 400Px + 200Py + 0.5I I = Average income; Px = Price of good x; Py = Price of good y. If Px = $100, Py = $50, and I = $60,000 a. Plot the demand curve for x, label all relevant points on the diagram. [4 marks] b. What is the price elasticity of demand? Interpret your results. [4 marks] c. What is the cross price elasticity with respect to good x? What does the sign of the coefficient tell us? Interpret your results. [4 marks] d. What is the income elasticity? What does the sign of the coefficient tell us? Interpret your results
Qx = 8000 – 400Px + 200Py + 0.5I a) The demand curve is drawn below: b) Price elasticity of demand is -5. This implies that the demand is elastic in nature. c) The cross price elasticity of…
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