Question

Suppose you are given the following supply and demand functions for Zazzy Products: Q D = 10,000 – 5P + 2Py - 3Pb + 3M + 6A Q S = 2,000 + 3P - 10Pw where: Q D = quantity demanded of Zazzy Products Q S = quantity supplied of Zazzy Products P = price per unit of Zazzy Products Py = price per unit of Good Y Pb = price per unit of Good B M = consumer income A = number of advertisements for Zazzy Products Pw = price of input W, used to make Zazzy Products a) With respect to buyer behavior for Zazzy Products, how is Good Y related to Zazzy Products? How do you know? (3 points) b) With respect to buyer behavior for Zazzy Products, how is Good B related to Zazzy Products? How do you know? (3 points) 13 c) With respect to buyer behavior for Zazzy Products, what type of good is Zazzy Products when it comes to income changes? How do you know? (3 points) d) With respect to seller behavior for Zazzy Products, what would happen to its production level if the price of the input, Good W, were to increase? How do you know? (3 points) 14 e) Assume the following figures: Price per unit of Good B = $4 Price per unit of Good Y = $2 Consumer Income = $30,000 Number of Advertisements for Zazzy = 15,000 Price per unit of Input W = $30 With this information, calculate the equilibrium price and quantity for Zazzy Products. You must show all your work. (8 points)

Answer 1

QD = 10,000 – 5P + 2Py - 3Pb + 3M + 6A

a) We can see that coefficient of Py is positive. So, as Py increases, QD will increase. Thus, Good Y is a substitute to Zazzy Products because increase in price of y decreases the demand for y and increases the demand fro Zazzy products.

b) We can see that coefficient of Pb is negative. So, as Pb increases, QD will decrease. Thus, Good B is a complement to Zazzy Products because increase in price of b decreases the demand for b and also decreases the demand fro Zazzy products.

c) Zazzy products are a normal good. This is because coefficient of M is positive which means as income increases, quantity demanded of Zazzy products also increases so they are a normal good.

d) Q S = 2,000 + 3P - 10Pw
We can see that coefficient of Pw is negative. So, as Pw increases, QS will decrease because of increase in cost of production. Thus, the production level would decline if the price of input were to increase.

e) QD = 10,000 – 5P + 2Py - 3Pb + 3M + 6A = 10,000 – 5P + 2(2) - 3(4) + 3(30,000) + 6(15,000) = 10,000 – 5P + 4 - 12 + 90,000 + 90,000 = 189,992 - 5P
Q S = 2,000 + 3P - 10Pw = 2,000 + 3P - 10(30) = 2000 + 3P - 300 = 1700 + 3P

So, at equilibrium, QD = QS
189,992 - 5P = 1700 + 3P
So, 3P + 5P = 189,992 - 1700
So, 8P = 188,292
So, P = 188,292/8 = 23,536.5

Q = 1700 + 3P = 1700 + 3(23,536.5) = 1700 + 70,609.5 = 72,309.5

P = 23,536.5
Q = 72,309.5