October 11, 2020
###### 5 Define the income and substitution effect . Then provide a graphical example of preferences that will lead only to an income effect and preferences…
October 11, 2020

3. Suppose the demand for guitars in State College is given by Qd = 8,000 – 10P where Qd is the quantity demanded, and P is the price of guitars. Also, suppose the supply of guitars is given by Qs = 30P – 2000, where Qs is the quantity supplied of guitars.a) Calculate the equilibrium price of guitars and the equilibrium quantity of guitars in State College. Show your work.c) Given your answer to b), is the price of guitars likely to rise, fall, or stay the same?d) Suppose guitars and guitar strings are complements. Draw a graph indicating what will happen in the market for guitar strings if the price of guitars decreases. Be sure to label your graph carefully, putting Price on the vertical axis and Quantity on the horizontal axis. You do not need to have actual numbers on this graph, but you should clearly indicate how the decrease in the price of guitars will affect the market for guitar strings, and what will happen to the equilibrium price and quantity of guitar strings.