Question

In the following linear demand function, Qxd = α0 + αxPx + αyPy + αMM + αHH where Py is the price of related goods, M is income, and H is other factors, the value of αM is:

Which options below:
a.positive if X and Y are complements.
b.negative if good X is inferior.
c.positive if good X is normal.
d.negative if X and Y are substitutes.

Answer 1

The value of αM in the linear demand function depends on the relationship between goods X and Y.

Step-by-step explanation:

In the linear demand function Qxd = α0 + αxPx + αyPy + αMM + αHH, the value of αM depends on the relationship between the goods X and Y. If X and Y are complements, then the value of αM would be positive. If good X is inferior, then the value of αM would be negative. If good X is normal, then the value of αM would be positive. And if X and Y are substitutes, then the value of αM would be negative.