Question

Explain and attach the corresponding graphs for the following market situations (explain what will happen with the new prices and equilibrium quantities compared to the initial situation):

a) In the market for a given inferior good, production costs and positive product publicity grow. (4 points)

b) A movie theatre increases its workers’ salaries. (4 points)
c) The market for an inferior agricultural good is in equilibrium, but a crash in the stock

market leads to a drop in consumers’ income levels. (4 points)

d) In the market for a normal good, the cost of the raw materials needed to manufacture that good drop, while, simultaneously, consumers of that good see an increase in their income. (4 points)

Answer 1

a) An inferior good is the one whose quantity demanded decreases as an increase in income. It is usually priced low. It has a negative income effect and negative price effect. If for a given inferior good, production costs increase, its price will increase. Positive product publicity grow will lead to an increase in the demand of the good. So the good will turn from inferior good to a normal good with a high price.

b) If the Movie theater increases its worker's salaries, it will take the additional amount from consumers. As a result, the prices of movie tickets will increase.

c) An inferior good's quantity will increase as a result of decrease in income. So the equilibrium quantity will increase at the same price for the inferior agricultural good.

d) A reduction in cost will lead to reduction in the price of the good. With an increase in income of the consumer and reduction in the price of the good, consumer will the price will fall but the quantity demanded will increase.

All graphs are drawn in the picture attached.