The following represents demand for widgets (a fictional product): Q D = 700 – 100P + 0.

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

QD = 700 – 100P + 0.5M + 30PR

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 = 900 + 57.5P

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

b.     Assume that M = $61,000 and PR = $250. 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 falls to $58,000 and supply conditions change such that QS = -300 + 50P. Solve algebraically for the new equilibrium price and quantity of widgets after these two changes.

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