The demand for good X is estimated to be Q_x^d = 10,000 − 4P_X + 5P_Y + 2M + A_X, where P_X is the price of X,P_Y is the price of good Y,M is income,and A_X is the amount of advertising on X.Suppose the present price of good X is $50,P_Y = $100,M = $25,000,and A_X = 1,000 units.Based on this information,goods X and Y are: A) substitutes. B) complements. C) normal goods. D) inferior goods.

Question

Quizplus · Accepted Answer

If the demand for good Y increases as the price of good X increases, then good X and Y are substitutes. Here, as the price of good X increases, the demand for good Y increases (as seen in the positive coefficient of P_Y in the demand function), indicating that they are substitutes. Therefore, the answer is A) substitutes. Goods X and Y would not be complements as the demand for one does not decrease as the price of other increases. They are normal goods because the demand for both goods increases as income increases. There is no evidence to suggest they are inferior goods.

The Demand for Good X Is Estimated to Be Qxd

The Demand for Good X Is Estimated to Be Q_x^d