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.