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QUESTION

The following represents demand for widgets (a fictional product): Q D = 650 - 4P - 0.

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

QD = 650 - 4P - 0.004M + 4PR

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 = 20 + 4P

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

b.    Assume that M = \$48,000 and PR = \$75.00. 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 \$50,000 and supply conditions change such that QS = 30 + 5P. Solve algebraically for the new equilibrium price and quantity of widgets after these two changes.