Question

Draw a supply and demand graph of the following scenarios. Use these graphs to answer what

happens to price and quantity? (Does is increase or decrease?) Must show graphs and answer

what happens to price and quantity.

a. (5 points) Cheese Market: Suppose that a technological advancement substantially

reduces the cost of producing cheese, while a new study suggests that excessive use of

cheese is harmful to a person’s health.

b. (5 points) Cream Market: Peaches and cream are complements. When the price of

peaches falls, and the price of raw milk (used to make cream) rises, what happens in the

market for cream?

Answer 1

a. Cheese Market: There is a technological advancement which substantially reduces the cost of producing cheese. This is likely to increase production. Supply is therefore increased and this implies a rightward shift of the supply curve. A new study suggests that excessive use of cheese is harmful to a person’s health. This is likely to discourage consumption so cheese is demanded less. Hence demand is decreased and this implies a leftward shift of the demand curve. Assuming the size of the shift remains same, we see that quantity of cheese exchanged at the final equilibrium remains unchanged (though depending on the size of shifts, this can increase or decrease as well). Price at the new equilibrium, however, declines.

b. Cream Market: Peaches and cream are complements. When the price of peaches falls, its quantity demanded is increased. This also increases the demand for its complement so that Demand for Cream increases. Also, the price of raw milk (used to make cream) rises. This is likely to decrease production. Supply is therefore decreased and this implies a leftward shift of the supply curve. Assuming the size of the shift remains same, we see that quantity of cream exchanged at the final equilibrium remains unchanged (though depending on the size of shifts, this can increase or decrease as well). Price at the new equilibrium, however, increases.