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Question

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

QD = 1058 - 250P -

0.0001M - 0.5PR

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

QS = 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 PR = $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 QS = 6 + 300P. Solve algebraically for the new equilibrium price and quantity of widgets after these two changes.

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