Homework #4 – Answer Key
1) Suppose that pizza demand is initially represented by the function D=71/3P 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=101/3P. 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=2205P 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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 Spring '07
 BALABAN
 Supply And Demand, economic downturn, Plasma TV, D=101/3P

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