Question

Short essay (10 pts) Draw a carefully labelled diagram to support your answers. Then write a short paragraph or two explaining your diagram and answering the following question:

Suppose Vancouver’s water supply became contaminated (consumers of the water would become ill). What do you predict would happen to the market for bottled water (Aquafina, Dasani, etc.,)? Do you think that Vancouver would be better off or worse off if the government ordered local stores NOT to raise prices for bottled water during this contamination emergency? Explain.

Answer 1

Ans. Due to contamination emergency, the demand for bottled water will increase, shifting the demand curve rightwards from D to D'. This will lead to a shortage of bottled water in the market, so, the price will increase leading to an increase in quantity supplied moving the market to new equilibrium market having higher price, P' and increased equilibrium quantity Q'. But if the government ordered that the price of bottled water should not change, so, at price P, there will be a shortage of bottled water in the market as at price P, quantity supplied is Q and quantity demanded is Q''. This will create a deadweight loss in the market as people willing to buy it at new increased price may not be able to get it.