Question

1. Currently the market for coats has an equilibrium price of $50 and the market for buttons has an equilibrium price of $2.

a) Suppose the price of zippers increases. Draw both the market for coats and the market for buttons. Explain how the change in the price of zippers affects the market for coats and buttons. Draw each market showing the changes you described and be specific about what happens to price in quantity in both markets (4 points)

b) If the change in the price for zippers in (a) was caused by a increase in the income of zipper buyers, explain whether this means zippers are a normal or inferior good. (2 points)

c) If the government has set a price ceiling of $50 on the price of coats, explain why some consumers are better off with the price ceiling, and some consumers are better off with the new equilibrium in the coat market in (a). (3 points)

d) Use diagrams to explain why this means you cannot tell whether the consumer surplus under the price ceiling of $50 is bigger or smaller than the consumer surplus under the new equilibrium in (a).   (3 points)

Answer 1

B) Normal goods = normal goods are those goods whose demand increase with the increase in income of consumers

INFERIOR GOODS=Inferior goods are those goods whose demand decrease with the rise in income of household

Zipper is Normal good because demand income with Inc in income

C) If government set price ceiling of coat reason customer better off with or without

• Price ceilings prevent a price from rising above a certain level.

• When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result.

• Price floors prevent a price from falling below a certain level.

• When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result.

• When government laws regulate prices instead of letting market forces determine prices, it is known as price control.

D)]

Above diagram shows consumer surplus under the price ceiling is bigger or smaller than the consumer surplus under the new equilibrium