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ARE100A INTERMEDIATE MICROECONOMICS: THEORY OF PRODUCTION AND CONSUMPTION FALL QUARTER 2009 Problem Set 10 answer guide 1. Q a = 10 – 2P a + P b ; Q b = 10 – 3P b + 2P a . And supply functions are vertical: Q a = 6 and Q b = 8. a. Draw the demand curve for Q a for a given P b. It is easiest to solve for pa for qa and plot and do the same for b.These are linear A has a slope, dP/dQ, -1/2 and B has a slope of -1/3. b. Are Q a and Q b substitutes or complements? Substitutes, when price of a goes up the quantity of B goes up as consumers shift from a to b. c. What are the prices that solve the multimarket equilibrium? Set Qa = 6 and Qb = 8 and solve the two demand equations for Pa and Pb. Pa =3.5 ; Pb= 3. 2. You and I want to trade some of my marbles for some of your candy. But the teacher won’t let us trade. Explain how her regulations may interfere with a Pareto improvement. We agree to the trade so we both expect to be better off so the trade would be Pareto improving. Blocking trades that are mutually beneficial causes loss to both parties. 3.
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