Consider the market for electricity. The monthly demand for electricity is given by:
Q = a + bP + cPg + dI,
where Q is the quantity of electricity consumed per month, P is the price of electricity, Pg is the price of natural gas, and I is income.
a. Explain what sign you would expect the coefficients b, c and d to have.
b. Suppose you have the following information.
|
Variable
|
Description
|
Value
|
|
P
|
price of electricity
|
$0.10
|
|
Q
|
quantity demanded
|
1,200
|
|
Pg
|
price of natural gas
|
$0.15
|
|
I
|
income
|
$3,000
|
|
ee
|
price elasticity of demand for electricity
|
-1.2
|
|
eeg
|
cross-price elasticity of demand for electricity with respect to price of natural gas
|
0.20
|
|
eI
|
income elasticity of demand for electricity
|
0.20
|
Derive the demand curve for electricity.