Homework Answers
a) The price coefficient of good 2 is -3.2. It is negative which indicates that if P2 rises, Q1 will fall. Hence good 1 and good 2 are complements. This is because when price of a good increases, its consumption is reduced which means the consumption / quantity demanded of its complement also decreases (both are consumed together, less of one good implies less of the other).
b) Quantity demanded is Q1 = 50 - 4*1.20 - 3.2*3.50 + 0.01*15000 = 184
Cross price elasticity = dQ1/dP2 * P2/Q1
= -3.2*3.50/184
= -0.061
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