Assume that products A and B are produced in competitive markets by different firms and are close substitutes. How would an increase in the price of product A affect the price of product B, and total expenditure on product B? Explain your answer.
Suppose the demand function for a product is Q= 200 -15P + 4I where P is the per unit price of the good, I is median household income in thousands of dollars, and Q is the number of units demanded per month.
a. Is the Law of Demand met? How do you know?
b. Is this good normal or inferior? How do you know?
c. If median family income is $30,000, what is the equation for the demand curve? Calculate point price elasticity at a price of $10. Is demand relatively elastic or inelastic at this price? How do you know?
d. Again assuming that median family income remains at $30,000, calculate arc price elasticity between a price of $10 and $12.