Question

300 - 5. + 25 + 50.1 Market Demand Q P ., D) Market S yQs (P) = 5. Suppose there are three scenarios Baseline Scenario New Scenario tipo New Scenario 2: P. 1- 0 and I and I - Equation Descriation Market leverantity demanded for pole smartwatches equals 500 minus 5 times the price per unit of Appemat watch plus 25 times the pie per unit of an Android smartwatch 50 timestegate consumer income Market level quantity supplied of applesmrtwatches quals stimes the price per unit of an Apple smartwatch. As an initial baseline scenario, assume the price per unit of an Android smartwatch is so and treate consumer Income is S. AS new scenario 1 assume the price per unit of an Android smartwatch is $6 and regate consumer income is $0.As new scenario 2 assume the price per unit of an Android smartwatch is so and a te consumer income is 56. Question comparing the equilibrium in new scenario 1 versus the baseline, explain economically what happened! The price of an Apple smartwatch increased, causing the demand for Apple smartwatches to decrease which decreased both the equilibrium price and equilibrium quantity for Apple watch treate consumer Income decreased causing the demand for Apple smartwatches to decrease which decreased both the equilibrium price and multibram quantity for Apple smart Agregate consumer Income increased, causing the demand for Apple smartwatches to increase which increased both the equilibrium price and equilibrium cantity for Apple smart watch The price of a substitute increased cause the demand for Apple Smartwatches to increase which increased both the equilibrium price and equilibrium quantity for Apple wat watches

Answer 1

QD=500-5p+25ps+50I

Base case

Put ps=0 and I=0

QD=500-5p+25*0+50*0=500-5p

Put QD=QS for equilibrium

500-5p=5p

10p=500

p=$50 (equilibrium price)

QD'=500-5p=500-5*50=250

QS=5p=5*50=250

Equilibrium quantity=QD=QS=250 units

Case : Scenario 1

Put ps=6 and I=0

QD'=500-5p+25*6+50*0=650-5p

Put QD'=QS for equilibrium

650-5p=5p

10p=650

p=$65 (equilibrium price)

QD'=650-5p=650-5*65=325

QS=5p=5*65=325

Equilibrium quantity=QD'=QS=325 units

Correct option is

Equilibrium price is $65, Equilibrium quantity is 325.

We observe that price of substitutes has increased from 0 to $6. Demand has increased due to this price change.

We also observe that equilibrium price and equilibrium quantity has increased due to change in price of substitute.

So, correct option is

The price of a substitute has increased, causing the demand for Apple smart watches to increase which increased the both equilibrium price and equilibrium quantity for Apple smart watches.