Assume SeatComfy Inc.estimates the demand for its table chairs to be Q = 5,000 - 25P + 4I +10P_A - 15 P_T,where P = the price of SeatComfy's chairs; P_A = average price of competitors' chairs; P_T = price of tables; and I = average income of SeatComfy's customers.Which of the following is true? A)SeatComfy's chairs are inferior goods; SeatComfy's chairs and tables are complements,while SeatComfy's and competitors' chairs are substitutes.SeatComfy's sales decrease by 250 units for each $10 increase in their own price. B)SeatComfy's chairs are normal goods; SeatComfy's and competitors' chairs are substitutes,while SeatComfy's sales are not affected by the pricing decisions of table producers.SeatComfy's sales increase by 50 percent if the price decreases by $2. C)SeatComfy's chairs are normal goods; SeatComfy's chairs and tables are complements,while SeatComfy's and competitors' chairs are substitutes.SeatComfy's sales decrease by 25 units as price increases by $1. D)SeatComfy's chairs are normal goods; SeatComfy's chairs and tables are complements,while SeatComfy's and competitors' chairs are substitutes.SeatComfy's sales decrease by 250 units as price increases by $1.

Question

Quizplus · Accepted Answer

The given demand function is Q = 5,000 - 25P + 4I +10P_A - 15 P_T Since the coefficient of I is positive (+4), it implies that SeatComfy's chairs are normal goods. The coefficient of P_A is positive (+10), which implies that SeatComfy's chairs and competitors' chairs are substitutes. The coefficient of P_T is negative (-15), which implies that SeatComfy's chairs and tables are complements. The price coefficient for SeatComfy's chairs is -25, which means that an increase in the price of SeatComfy's chairs by $1 reduces the demand by 25 units. So, an increase of $10 in the price of SeatComfy's chairs will decrease the demand by 250 units (25 x 10). Therefore, option C is the correct answer.