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Homework Economic for Managers

In: Business and Management

Submitted By espys
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WEEK ONE

Homework.

Answer all questions, a through f. On questions c, d, e and f show your math. If you do not show your math you do not receive points.

The general demand function for a good, Good A, is…

QD = 800 – 5*P + 0.02*M + 6*PR + 3*T + 5*PE + .4*N

Where
QD = quantity demanded of Good A per month
P = the price of Good A
M = average household income
PR = the price of a related good, we’ll call it Good B
T = a consumer taste index
PE = the price consumers expect to pay next month for Good A
N = the number of buyers in the market

a. Is Good A a normal good or an inferior good? How do we know exactly?

Good A is a normal good, and we know this because the sign on the coefficient in front of the income variable M is positive. (If the equation read QD = 800 – 5*P - 0.02*M … then it would be an inferior good.) The positive sign means that as income (M) increases, so too does the quantity demanded of this good.

b. Are Good A and Good B complements or substitutes? How do we know exactly?

Goods A and B are substitutes, and we know this because the sign on the coefficient in front of the “Price of Related Good” variable, PR, is positive. (If the equation read QD = 800 – 5*P + 0.02*M - 6*PR… then they would be complements.) The positive sign means that as the price of the OTHER good, Good B, increases the quantity demanded of this good, Good A, increases. This is because as the price of the other good, Good B, increases people are shifting away from that good and demanding this good instead. Hence, they are substitutes.

c. Assume M = $80,000, PR = $30, T = 5, PE = $12, and N = 6,000. Using these, calculate and write down the direct demand function for Good A. Show your math. Watch the decimals! The coefficient on M is 0.02 and the coefficient on N is .4

If M = 80,000 and PR = 30 and T = 5 and PE = 12 and N = 6,000

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