Suppose we have 2 goods x₁ and x₂ with respective prices p₁ and p₂. Sam has income
I. Sam’s demand function for good x₁ is given by:
x₁ (p₁, p₂, I) = p₂I − p²₁
a) Are goods x₁ and x₂ substitues or complements? Explain.
b) Suppose that p₂ = 5 and I = 10. If there are 20 consumers in the market with demand functions identical to Sam’s, what is the market demand function?
c) Find the price elasticity of demand if p₁ = 3.
d) Given the price elasticity you just calculated, is x₁ a Giffen good? Explain.