Question

∗ percy consumes cakes and ale. his demand function for cakes is qc = m − 30pc + 20pa, where m is his income, pa is the price of ale, pc is the price of cake and qc is the quantity of cake.

Answer 1

Solution:

Since there exists a positive relationship between price of ale and demand for cakes, the two are substitutes.

After substituting the given values,

Qc = 100 – 30pc + 20 pa

Where, qc= quantity of the cake, m = income of percy, pa = price of ale, pc = price of cake

Qc = 120 – 30 pc

Now, Rearranging demand function calculated above,

Qc = 120 – 30 pc

30 pc = 120 – Qc

Thus, Pc = 4 – 0.033 Qc