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Homework #4 – Answer Key 1) Suppose that pizza demand is initially represented by the function D=7-1/3P and supply is represented by S=1+2/3P. An increase in the price of a substitute (hamburgers) shifts the demand for pizza to D=10-1/3P. Equilibrium quantity: a) Increases 3 units b)Decreases 2 units c) Increases 2 units d) Decreases 3 units e) Stays the same Answer: c) We start by computing the initial equilibrium by setting S=D. Equilibrium price is 6 and equilibrium quantity is 5. Now, we compute the new equilibrium after the shift in demand. We set the new demand equal to the supply. Equilibrium price is now 9 and equilibrium quantity is 7. Therefore, quantity increased 2 units from the initial equilibrium to the new equilibrium. 2) Consider the Plasma TV market. Its initial equilibrium is given by original demand D=250- 5P and supply S=170+3P. Due to the economic downturn, personal income falls, leading to a shift in demand. Also, technological progress has reduced production costs, leading to another shift in supply. The new demand is D=220-5P and the new supply is S=188+3P. Which of the following is true about the new equilibrium, when compared to the initial one? a) Price rises \$6 and quantity decreases 10 units b) Price falls \$6 and quantity stays the same c) Price rises \$10 and quantity increases 10 units

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