Question

For each of the following separate parts, you are required to draw one or two graphs.

(a) Draw two graphs to compare the price elasticity of supply of (i) diamond vs (ii) clothing.

(b) A country builds universities and casinos. The country spends all the money to build universities now, show how this current choice affects the future PPF of the country.

(c) Consider the market for gasoline. Suppose the price of electric cars decreases, draw a graph to show the change in equilibrium of the market for gasoline.

(d) Good A is a necessity, and it is also an inferior good. Draw a graph to show the demand curve of good A and how the demand curve changes if household incomes increase. (Hint: is the demand curve steep or flat?)

Answer 1

Sol :

a) Price elasticity of supply for diamond is inelastic because, diamond is scarce resources and doesnot have substitue in the market.whereas price elasticy of supply for the clothing is unit elastic because it is a normal goodsand consumer can postpone their demand for the product in case of higher price of vice - versa , so elasticty of supply for the clothing is unit elastic.

Elaticity of supply is inelastic ( Es < 1 )

elasticty of suply for Clothing ( unitary Elastic = 1 )

b) If the countries has to choos e between the universities and casinos . And if, country decide to build more universities over casinos will shift the Future PPF of the country .

because, if more universities are open , then more skilled people will be in the eocnomy , due ot more skilled worker , production effiiency will obciously tends to increase and finally it will shift the PPF of the country.

c) market of gasolineis at equilibrium of point E where Market demand and market supply but if the price of the electric car decreases which means that the demand for the elctricity increases and demand for gasoline (petrol car) decreases.

this will shift the demand for the gasoline to left and price of the gasoline increases.

d) Good A is inferior and necessity , so price elasticity of demand is inelastic (less than 1 ) . { demand curve is Steep}

if the income increases , then the demadn curve for the inferior good A decreases because inferior goods has negative effect on inferrior goods.