Question 2.
Let's consider a basic linear demand function.
$Qdx = 100 - 5Px + 2Y - 3Py$
Where $Qdx$ is the quantity demanded for X, $Px$ is the price of good X, Y is the income and $Py$ is the price of good Y.
a. Explain the meaning of each coefficient in this demand function.
(4 marks)
b. What does a coefficient of -5 for $Px$ indicate about the relationship between good's price and its quantity demanded?
(2 marks)
c. If the price of good ($Px$) increases by 2 units, how would the quantity demanded change, assuming other factors remain constant?
(2 marks)
d. If the consumer income (Y) rises by 10 units, how would it affect the demand for X?
(2 marks)
e. What does the positive coefficient of 2 on income implies about the nature of the good in relation to income?
(1 mark)
f. Given that $Px = 10$, $Y = 50$ and $Py = 20$, calculate the quantity demanded.
(2 marks)
g. Calculate the price elasticity of demand at $Px = 15$, $Y = 50$ and $Py = 20$. Explain the meaning of the value. Explain the appropriate pricing strategy that can be implemented by the company.
(3 marks)
h. If the company decides to introduce an advertising budget in the equation above, what are the changes that can take place.
(1 marks)
i. Write the alternative hypothesis for the independent variables mentioned above.
(3 marks)
TOTAL 20 MARKS
