Answer Key for Homework #3
Question 1
(a) Since 100

1
2
Q
=
1
4
Q
, the equilibrium quantity is
Q
=
400
3
;
133
.
33. Then, the
equilibrium price is
P
=
1
4
×
400
3
=
100
3
;
33
.
33.
(b) Since 80

1
2
Q
=
1
4
Q
, the new equilibrium quantity is
Q
=
320
3
;
106
.
67. Then,
the new equilibrium price is
P
=
1
4
×
320
3
=
80
3
;
26
.
67.
The crossprice elasticity of demand is
320
3

400
3
1
2
×
(
400
3
+
320
3
)

1
10
=
80
3
360
3
1
10
=
80
36
;
2
.
22
.
Since the elasticity is positive, the clothes by the Cheap Apparel are substitutes for
clothes by the Lavish Fashion.
(c) Since 90

1
2
Q
=
1
4
Q
, the new equilibrium quantity is
Q
= 120. Then, the new
equilibrium price is
P
= 30.
The income elasticity of demand is
360
3

400
3
1
2
×
(
400
3
+
360
3
)
1
10
=

40
3
380
3
1
10
=

40
38
;

1
.
05
.
Since the elasticity is negative, the clothes by the Cheap Apparel are inferior goods.
Question 2
(a) The Table 1 includes answers.
(b) Consuming 2 more red pills gives him 25 additional utility. (13 for 2nd one and
12 for third one) Consuming 1 more blue pill gives him 24 additional utility. (24 for
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '11
 Doolittle
 Math, Economics, Supply And Demand, Cheap Apparel

Click to edit the document details