Question

# 1. The following represents demand for widgets (a fictional product):

Q_{D} = 1058 - 250P -

0.0001M - 0.5P_{R}

where P is the price of widgets, M is income, and P_{R} is the price of a related (fictional) good, the wodget. Supply of widgets is determined by

Q_{S} = 2 + 250P

a. Determine whether widgets are a normal or inferior good, and whether widgets and wodgets are substitutes or complements.

b. Assume that M = $50,000 and P_{R} = $2.00. Solve algebraically to determine the equilibrium price and quantity of widgets.

c. Generate a supply/demand graph in Excel. Be sure that P is the vertical axis and Q the horizontal. Does the graphical equilibrium correspond to your algebraic equilibrium?

d. Now assume two events occur: income rises to $60,000 and supply conditions change such that Q_{S} = 6 + 300P. Solve algebraically for the new equilibrium price and quantity of widgets after these two changes.

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