Suppose the relationship between Demand for good x (Qx) can be described by the following linear relationship (Py: price of good y, I = income):
Qx= 300 – 10Px - 6Py + 2 I
a) From the demand relationship above, you conclude: Goods X and Y are substitute/complementary goods because_______________________, and an increase in Py would cause the increase in quantity demanded/increase in demand for X. Show this on a graph below.
b) From the demand relationship above, Good X is a normal/inferior good because.....
c) Suppose Py = $15 per unit, and I = $100, and Px = $10. At these prices and income, the price elasticity of demand is equal to _______ and the cross price elasticity of demand is equal to _______. Interpret these numbers.
d) From the computations in part c), you can say that demand for good X is elastic/inelastic. How would a decrease in price of X affect expenditure (revenue) on good X, other things constant?