Problem 1:
The X-Corporation produces a good (called X) that is a normal good. Its competitor, Y-Corp., makes a substitute good that it markets under the name “Y.” Good Y is an inferior good.
a. How will the demand for good X change if consumer incomes increase?
b. How will the demand for good Y change if consumer incomes decrease?
c. How will the demand for good X change if the price of good Y decreases?
d. Is good Y a lower-quality product than good X? Explain.
Problem 2:
Good X is produced in a competitive market using input A. Explain what would happen to the supply of Good X in each of the following situations:
a. The price of input A increases.
b. An exercise tax of $1 is imposed on good X
c. An ad valorem tax of 5 percent is imposed on good X
d. A technological change reduces the cost of producing additional units of good X.
Problem 3:
The demand for good X is given by:
Qdx = 1,200 – ½ Px + ¼ Py – 8Pz + 1/10 M
Research shows that the prices of related goods are given by Py =$5,900 and Pz = $90, while the average income of individuals consuming this product is M = $55,000.
a. Indicate whether goods Y and Z are substitutes or complements for good X.
b. Is X an inferior or a normal good?
c. How many units of good X will be purchased when Px = $4,910?
d. Determine the demand function and inverse demand function for good X. Graph the demand curve for good X.