Question

4A. Assume that in the market for credit cards there is some elasticity of supply and demand and that the equilibrium money price is 29%. Construct a market for credit cards showing the actual market price. Label initial supply and demand with subscript “1”. Analyze the likely effect in the market for credit cards if state governments across the country impose a cap on credit card interest rate at 19%.

4B. Depict the market for soda depicting supply, demand, equilibrium price and quantity with subscript 1 and assuming that both demand and supply have some elasticity. Assume soda and pizza are complement goods. Analyze the likely effect in the market for soda labor if the price of pizza decreases.

Answer 1

1] IN THE GIVEN SITUATION OF CREDIT, price falls from 29% to 19% which creates increase in demand supply being constant, which leads to the situation of excess demand over the given supply, even sellers are less willing to sell at decreased price.

2] in this question being everything of soda constant, given that pizza being complementary good of soda, there is decrease in the price of pizza, therefore,there will be inward shift of demand curve, being cross price elasticity therefore, quantity shifts from QD1 TO QD2 but the supply curve is same and constant for soda, which lead to decline in prices and decline in the supply curve making new equilibrium below the previous one represented by the doted line in the graph, thus by that concluding there will be effect on labour market to as demand and supply both falls there will be increase in unemployment due to economical balancing.