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.

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.)

Answer 1

1. Qt is the function of Pt, Y, A, N, Pc
   The determinants of demand are
   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. Y and N are independent variables
3. Average household income and population are directly proportional to the quantity demanded of cow’s milk (ie if Y and N increases Qt also increase)
   The price of fresh cow milk, advertising expenditure on pocket milk, and price of processed pocket milk is inversely proportional to Qt.
   There
   Qt = – aPt + by – CA + dN – ePc