Question

The following equation represents the demand for butter estimated using the problem set data (if interested, you could reproduce these coefficient estimates) Qbt-49.66 14.59Pbt 33.55Pmt 1.73Inc + 25.31Seas Briefly answer the following questions: 1. Are butter and margarine complements or substitutes? Why? (3 Points) 2. Is butter a normal good or an inferior good? Why? (3 Points) 3. How much larger (on average) is the demand for butter in the peak period? (3 Points)

Answer 1

1) The coefficient of price of margarine has a positive value implying that a rise in price of margarine will raise the quantity demanded of butter. Hence the two goods are substitutes

2) Butter is a normal good because the coefficient value of income is positive so that a higher income raises the quantity demanded of butter.

3) This cannot be answered unless specific assumptions are made because there is a lack of information. If we assume that all variables have a value of 0, then the linear demand curve will have a maximum value of 49.66 units