hmk4_sol_20.pdf - Intermediate Microeconomics Homework Set...

Intermediate Microeconomics
Homework Set 4: Demand
Solutions
Exercise 1
Percy consumes cakes and ale. His demand function for cakes is q
c
= m - 30 p
c
+ 20 p
a
,
where p
a
is the price of ale, and p
c
is the price of cakes, and q
c
is his consumption of
cakes. Percy’s income is $100, and the price of ale is $1 per unit.
(a) Is ale a substitute or a complement for cakes?
(b) Write an equation for Percy’s demand function for cakes with the values of income
and p
a
given above.
(c) Write an equation for Percy’s inverse demand function for cakes with the values
of income and p
a
given above. At what price (of cake) would Percy buy 30 cakes?
Use blue ink to draw Percy’s inverse demand curve for cakes.
(d) Suppose that the price of ale rises to $2 . 50 per unit and remains there. Write an
equation for Percy’s inverse demand for cakes. Use red ink to draw in Percy’s new
inverse demand curve for cakes.
Answer: