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AK_HW3

# AK_HW3 - Answer Key for Homework#3 Question 1 1(a Since 100...

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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 cross-price 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

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