Question

A Research scholar researching the market for fresh cow milk assumes that Qt = f (Pt, Y, A, N, Pc) where Qt is the quantity of milk demanded, Pt is the price of fresh cow milk, Y is average household income, A is advertising expenditure on processed pocket milk, N is population and Pc is the price of processed pocket milk.

Answer 1

1. What does Qt = f (Pt, Y, A,N, Pc) mean in words? 

2. Identify the independent variables. 

3. Make up a specific form for this function.

(Use your knowledge of Economics to deduce whether the coefficients of the different independent variables should be positive or negative.)

1. Qt is the function of Pt, Y, A, N, Pc

Pt – Price of fresh cow milk

Y = Average household income

A = Advertising expenditure on processed pocket milk

N = Population

Pc = Price of processed pocket milk

2. Identify the Independent variables.

“Y” = Average household income

“N” = Population [“N” are Independent Variables]

Pc = Price of processed pocket milk

“Pc” = depending “Pt”

= Pc depending “A”

“A” = depending “N”

∴ Pc depending “Pt” , “A” , and “N”.

3. Make up specific form for this function [use your knowledge of Economics to deduce whether the co-effecients of the different independent variables should be positive or negative]

• “N” = Population When the population increases and quantity of milk demanded Increases.
• “A” = Advertising expenditure on processed pocket milk When advertising expenditure on processed pocket milk increases the quantity of milk demanded. Increases.

“Y” – Average household Income 

When average household income Increases and quantity of milk demanded Increases.

“Pt” – Price of fresh cow milk

When price of fresh cow milk Increases quantity of milk demanded decreases.

∴ Qt = (-Pt) (+Y) (+A) (+N) (- Pc)

(-) means decreases; (+) means Increases

∴ Qt = [- Pt + Y + A +N – Pc]