Q1. Suppose demand function for good x is estimated to be Qx = 8000 - 400Px + 200Py + 0.5I
I = Average income; Px = Price of good x; Py = Price of good y.
If Px = $100, Py = $50, and I = $60,000
a. Plot the demand curve for x, label all relevant points on the diagram.
b. What is the price elasticity of demand? Interpret your results.
c. What is the cross price elasticity with respect to good x? What does the sign of the coefficient tell
us? Interpret your results.
d. What is the income elasticity? What does the sign of the coefficient tell us? Interpret your results