Question

Diners in Maine are indifferent between Diver Scallops and Lobster, which are identically priced. The market we are considering is the market for Diver Scallops. Assume that there are no independent scallopers only large firms that employ them. For each of the following scenarios describe what happens in a supply-demand graph in the market for Diver Scallops. Make sure to indicate what happens to P and Q.

You can answer each part with one sentence.

A)        Sick of high taxes, many people move out of Maine and fewer tourists visit.

B)        There is a significant quantity restriction on harvesting Maine lobster.

C)        New harvesting technologies reduce the cost of harvesting Diver Scallops.

Answer 1

A) Sick of high taxes, many producers will run out of market which will reduce aggregate supply of Maine. Fewer tourist visit will reduce aggregate demand of Maine.

Backward shift in supply as well as demand curve will keep price as its same level while reduce output level further.

B)

Quantity restrcition of Maine Lobster will raise its price. As people are indifferene between Lobster and Diver Scallops, they will demand more of it because it will be comparatively cheaper to consume. Rightward shift in demand curve will raise price of Driver Scallops from P to P1 and raise output from Y to Y1.

C) Reduction in cost of Diver Scallops due to new harvesting methods will induce producers to produce more of it which will shift aggregate supply curve to its right from AS to AS1 where it will reduce price from P to P1 and raise output from Y to Y1.