Question

7. Suppose that the government impose a tax of $1 on the production of Nikes (Jordans). At the same time Nikes and Reeboks are substitutes and the price of Reeboks decrease. What happens to equilibrium price and quantity? Illustrate using a graph.

8. Assume that producers expect the price of orange juice to be lower in December. At the same time a new study just released states that drinking more orange juice will increase your chance of not getting cancer. What happens to equilibrium price and quantity? Which quantity is affected and how do you know? Illustrate using a graph.

Answer 1

7) As there is fall in price of Reebok shoes when there is tax imposed on Nike Jordans which raise the price of Jordans. Both of the being are substitutes to each other. Rational consumer will buy more of Reebok shoes to maximize their utility which will raise its demand and shift aggregate demand curve to its right from AD to AD1. It tends to raise price level from P to P1 and output level from Y to Y1 of Reebok shoes.

Impact on Nike shoes: It will reduce the quantity demanded of Nike and shift its demand curve to its left from AD to AD1 which tends to reduce the price level from P to P1 and reduce output level from Y to Y1.

8) If new study states that consuming orange juice will reduce the chance of getting cancer, consumees will demand more of orange juice which shift aggregate demand curve to its right from AD to AD1. It tends to raise price level from P to P1 and output level from Y to Y1 of orange juice in Decembar rather than raising it.