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Assume that demand for product A can be expressed as QA = 500 ¨C 5PA + 3PB and demand for
product B can be expressed as QB = 300 ¨C 2PB + PA. Currently, market prices and quantities for
these goods are PA, = 5, PB = 2, QA = 481, and QB = 301.

a. Suppose the price of product B increases to 3. What happens to the quantity demanded of
both products?

b. Calculate the arc cross©\elasticity between product A and product B using prices for product
B of 2 and 3.

c. Are these goods substitutes or complements?

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