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Unformatted text preview: Homework #2 – Answer Key 1. Consider the following demand schedule: If the price is 7, the quantity demanded will be: a) 53/4 b) 30 c) 32 d) 33/4 Answer: c). Using the demand schedule we can derive the linear equation that represents the demand (Q=mP+b). We only need 2 points to do so. Lets choose the combination (20,10) as our point 1, and combination (40,5) and our point 2. The slope will then be m=(40-20)/(5-10)=- 4. So we know that Q=-4P+b. Substituting the values of point 1 (for instance) in the equation, we can find the intercept. So, 40=-4×5+b, which implies that b=60. The demand function is Q=-4P+60. Now, all we have to do is to plug in our price (7) to find the quantity demanded: Q=-4×7+60=-28+60=32. 2. Let the demand for an inferior good be Q = 100-3/2P. If income goes up, which of the following could be the new demand: a)Q= 150 – 3/2P b) Q=150 – 2P c) Q=100 – 2P d) Q=50 – 3/2P Answer: d). Note that an inferior good is defined by the fact that, when income increases, demand falls. Therefore, we are looking for a reduction in the intercept , as the slope is left unchanged. Option d has the same slope and a lower intercept when compared with the original demand function....
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