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Suppose that the general demand function for good X is Qd = 60 - 2Px + 0

Economics

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Suppose that the general demand function for good X is

Qd = 60 - 2Px + 0.01M + 7PR

where

Qd = quantity of X demanded

Px = price of X

M = (average) consumer income

PR = price of a related good R

i. Is good X normal or inferior? Explain. (1 mark)

ii. Are goods X and R substitutes or complements? Explain. (1 mark)

iii. Suppose that M = ¢40,000 and PR = ¢20. What is the demand function for good X? (2 marks)

Suppose the supply function is Qs = -600 + 10Px

iv. What are the equilibrium price and quantity? (3 marks)

v. What happens to equilibrium price and quantity if other things remain the same as in part (iv) but income increases to ¢52,000? (3 marks)

vi. What happens to equilibrium price and quantity if other things remain the same as in part (iv) but the price of good R decreases to ¢14? (3 marks)

vii. What happens to equilibrium price and quantity if other things remain the same, income and the price of the related goods are at their original levels, and supply shifts to Qs = -360 + 10Px? (4 marks)