Question

Consider a scenario where the demand is estimated to be represented by the following equation: ,
Qx = 1000 - 10Px + 0.1I + 10Py
Where Px is the price of X, I represents the income of the consumer, Py is the price of another related in consumption good, and Qx is the quantity demanded of X. Based on this, what can be concluded about the relationship between good X and Y?
A), They are substitutes in consumption
B), They are complements in consumption
C), They are unrelated in consumption
D), There is not enough information provided to make any conclusion

Answer 1

Answer:

Option (A) is correct.

Explanation:

Qx = 1000 - 10Px + 0.1I + 10Py

Suppose income of the consumer and the price of good x remains constant at

I = $100

Px = $10

Initial price of good y, Py = 10

So,

Qx = 1000 - 10(10) + 0.1(100) + 10(10)

     = 1000 - 100 + 10 + 100

     = 1,010 units

If price of good y increases to $20, then,

Qx = 1000 - 10(10) + 0.1(100) + 10(20)

     = 1000 - 100 + 10 + 200

     = 1,110 units

This will results in an increase in the quantity demanded for good x which shows that there is a positive relationship between the price of good y and quantity demanded for good x.

This indicates that good x and good y are substitute goods.