The demand for organic carrots is given by the following equation:
QOD = 75 - 5 PO + PC + 2I
Where PO is the price of organic carrots, PC is the price of conventional carrots, and I is the average consumer income.
Notice how this isn't a standard demand curve that just relates the quantity of organic carrots demanded to the price of organic carrots. This demand function also describes how other factors affect demand - namely, the price of another good (conventional carrots) and income.
a. Graph the inverse demand curve for organic carrots when PC = 5 and I = 10. What is the choke price?
b. Using the demand curve drawn in (a), what is the quantity demanded of organic carrots when PO = 5? When PO = 10?
c. Suppose PC increases to 15, while I remain at 10. Calculate the quantity demanded of organic carrots. Show the effects of this change on your graph and indicate the choke price. Has there been a change in the demand for organic carrots, or a change in the quantity demanded of organic carrots?
d. What happens to the demand for organic carrots when the price of conventional carrots increases? Are organic and conventional carrots complements or substitutes? How do you know?
e. What happens to the demand for organic carrots when the average consumer's income increases? Are carrots a normal or an inferior good?