The market price of cheeseburgers in a university town increased recently, and the students in an economics class are debating the cause of the price Increase.

13. Another supply and demand puzzle

The market price of cheeseburgers in a university town increased recently, and the students in an economics class are debating the cause of the price Increase. Some students suggest that the price increased because the price of beef, an important ingredient for making cheeseburgers, has increased. Other students attribute the increase in the price of cheeseburgers to a recent increase in the price of calzones at local pizza parlours.

Everyone agrees that the increase in the price of calzones was caused by a recent increase In the price of pizza dough, which is not generally used in making cheeseburgers. Assume that burger joints and pizza parlours are entirely separate entities-that is, there aren't places that serve both cheeseburgers and calzones.

The first group of students thinks the increase in the price of cheeseburgers is due to the fact that the price of beef, an important ingredient for making cheeseburgers, has increased.

On the following graph, adjust the supply and demand curves to illustrate the first group's explanation for the increase in the price of cheeseburgers.

Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther.

The second group of students attributes the increase in the price of cheeseburgers to the increase in the price of calzones at local pizza parlours. On the following graph, adjust the supply and demand curves to illustrate the second group's explanation for the increase in the price of cheeseburgers.

Suppose that both of the events you have just analyzed are partly responsible for the increase in the price of cheeseburgers. Based on your analysis of the explanations offered by the two groups of students, how would you figure out which of the possible causes was the dominant cause of the

increase in the price of cheeseburgers?

Whichever change occurred first must have been the primary cause of the change in the price of cheeseburgers.

If the equilibrium quantity of cheeseburgers decreases, then the demand shift in the market for cheeseburgers must have been larger than the supply shift.

If the equilibrium quantity of cheeseburgers decreases, then the supply shift in the market for cheeseburgers must have been larger than the demand shift.

If the price increase was large, then the supply shift in the market for cheeseburgers must have been larger than the demand shift.

Solutions

Expert Solution

In the first case (ingredient price increases) : Supply curve shifts to the left (equilibrium quantity decreases and price increases)

In the second case (substitute price increases) : Demand curve shifts to the right (equilibrium quantity increases and price increases)

Option 3 is correct (correct option has been chosen)

Rahul Sunny answered 2 years ago

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