**Q.1 Substitutes and Complements**

Name substitutes and complements for the following goods:

Good Substitutes Complements

Airline ticket Railway Tickets, Bus Tickets, Ship Tickets Airport Cab Service, Movers and Packers Service, Travel and Tours Services.

Mystery novel Newspapers, EBooks, Articles, Movies Spectacles, Mystery Shows

Iced tea Cold Coffee, Cold Drinks, Juices Milk, Cream, Biscuits

**Q.2Finding Equilibrium Graphically**

The following two equations show how the price changes with the quantity of a good demanded and supplied.

Demand: P = 800 - 2 Q D

Supply: P = 200 + 1 Q S

• The demand and supply are equal when price is Rs.400/-, at that point demand is 200 units, which is also equal to supply.

• The above graph shows that price and the quantity demanded have a negative relation, whereas the price relation with supply is positive which means that as prices increase, the demand tend to go down whereas the supply of goods increases and vice versa. The relationship between demand, supply and price is in line with law of Demand and Supply.

• The slope of demand functionis -2, which shows that the line representing the demand function is facing downwards and is falling. This shows that with increase in quantity (on X-axis), the price will always decrease (on Y-axis).

• The slope of Supply function is 1, which tells us that supply line is rising up from bottom left to top right. This means that with increase in quantity supplied (on X-axis), the price will also increase (the Y-axis).

**Q.3 Finding the Equilibrium Algebraically (20 points)**

Using the same demand and supply function above, find the equilibrium quantity demanded and price using the method described in Chapter 4. Show your work. Is the same answer you got above? (If not, then you have the wrong answer to at least one of the questions

**Data Given:**

Demand: P = 800 - 2 Q D

Supply: P = 200 + 1 Q S

**Solution:**

As at equilibrium position, the demand and supply are equal and therefore price is also equal.Thus, let the demand equation be;

200 + 1Qs = 800 – 2Qd

1Qs + 2Qd = 800 – 200

As Demand and Supply are equal;

3Q = 600

**Therefore Quantity at which demand and supply are equal is;**

Q = 200

Hence,Price equals;

P = 800 – 2Qd

P = 800 – 2 (200)

P = 400

**Q.4. Effects on Equilibrium Level of Sailboats Market of following events;**

• ESPN coverage of the America's Cup sailboat races increases interest in sailing

This will certainly be of great interest for the youth as they get to see a sport that is adventurous.It may have a positive impact on demand of sailboats, as more people may want to take ride of sailboats. Moreover, the businesses that provide sailboats on rent may want to increase the number of sailboat they have to increase their sails. The suppliers should have to clearly anticipate this increase in demand earlier before start of this event and may have to increase their supply.

The changes on equilibrium position of demand and supply will indirectly depend upon the success of the event. If it is a success,then the demand will increase and equilibrium position will also increase resulting in increased equilibrium prices and if the event does not become popular then the supplier should be ready to provide more due to increase in supply, the equilibrium prices will decrease due to oversupply.

**• Producers expect the price of sailboats to rise next year.**

The producers expect that the price will increase in the future, due to this they may plan to supply more lately and less now, which theoretically will affect the equilibrium price of sailboats. Therefore, the prices of sailboats will increase in future, however if consumers expect that price will increase than prices will certainly increase........................

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