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

a) Price elasticity of supply of diamond is highly elastic. Because the producer gets long period of time to response to the change in price. So it's supply is highly elastic. And also there is few substitutes for diamond. So the price elasticity of supply of diamond is highly elastic.

At the same time the price elasticity of supply of clothing is less elastic. Because it has more substitutes.

The following graph shows the price elasticity of supply of diamond and clothing

B) The country has the following production possibility frontier ( PPF) because there is increasing opportunity cost. They sacrifice more casinos for produce universities.

C) When the price of electric cars are decreased then the demand for electric cars are increased. Then the demand for gasoline decreased. The following graph shows the old equilibrium of the gasoline market is e and the new equilibrium is e1 because the demand curve is shifted to D1.

D) Good A is a necessity good so the demand curve is upward sloping because the good is necessary so when price rises demand doesn't fall.

Good A is an inferior good so when income increase the demand for good A decreases. So the demand curve is shifted downwards and it is steeper.

The following diagrams show the demand curve of good A and the change in demand of the good due to increase in income.