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problem set 2 - answer - ECON 101-Fall 2007 PROBLEM SET...

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ECON 101 -Fall 2007 PROBLEM SET 2-ANSWER KEY Professor Serrano-Padial Due on Tuesday 25th at 9pm in your TA mailbox. Please remember to write down your name, the name of your TA and your discussion section. Staple pages together. 1 The demand curve The demand for bacon in the great island of Lala is given by q b = 120 - 2 p b + 60 c - 5 p t , where q D is the quantity of bacon (in pounds) demanded, p b is the price of a pound of bacon, c is equal to 0 if the weather is warm and equal to 1 if the weather is cold; and p t is the price of tortillas. Assume for the moment that the weather is warm ( c = 0) and that the price of tortillas is p t = 4. 1. Graph the demand curve for bacon. What is the demand when the price of bacon is $20? How much does the demand change when the price drops from $20 to $10? Is this a shift or a movement along the demand curve? Answer: The demand curve is p b = 50 - 0 . 5 q b . See graph below. When p b = 20 the demand is q b = 60. The quantity demanded increases 20 pounds. It is a movement along the demand curve.
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