Question

a.    Consider the following demand function

^Q_x^{= 50 - 2P}_x ^{+ 4P}_y^{- 41}

Suppose that price of good X is 5, price of good y is 2.5, and income is 10. Find the following;

i.        Own price elasticity of demand.       [2 Marks]

   ii.  Cross price elasticity of demand.    [2 Marks

iii.  Are X and Y substitute or complements? Explain.  [2 Marks]

   iv. Income elasticity of demand for good X. [2 Marks]

    v.  Is X a normal good or inferior good? Explain.   [2 Marks]

      vi. Is X a luxury good or a necessity good? Explain.  [2 Marks]

Answer 1

Answer 2

b. The global economy has been shaken by the outbreak of the covid-19. i. With the aid of a clearly labelled diagram(s), explain what has happened to the market for face masks. [5 Marks] ii. Suppose that the price of face masks received a once-off increase, use a clearly labelled diagram to show the decomposition of this price change into the income and substitution effect. [5 Marks] iii. Are face masks inferior goods or normal goods? Why?