Question

1.   Using the supply and demand model, graphically show the effect of each of the following changes on the equilibrium price and quantity in the market for bacon:
a.   A decrease in the price of sausage links (explain any assumptions you make).

b.   An increase in the price of corn, which is fed to pigs (explain any assumptions you make).

c.   An increase in the average income of consumers (explain any assumptions you make).

d.   The introduction of a price floor on bacon.

Answer 1

Answer;

In the above all figures, x-axis shows quantity and y -axis shows price. D is the demand curve S is the supply curve. E is the initial equilibrium point. Panel A,B,C and D shows the folowing effects respectively.

a. Bacon and sausage are substitute goods. The decrease in the price of one commodity reduces the demand for its substitute. Decrease in the price of sausage links resulted fall in the demand for bacon. The demand curve shift to the left. The price reduces from p to p1 and quantity also reduces from q to q1.

b.   As the result of  increase in the price of corn, which is fed to pigs , the supply reduces , the supply curve shift to the left. The price increass from p to p1 and quantity reduces from q to q1.

c.   An increase in the average income of consumers caused increase in demand of bacon. The demand curve shift to the right. The price increases from p to p1 and quantity also increases from q to q1.

d.   The introduction of a price floor on bacon resulted increase in price fro p to p1. The quantity demanded reduces from q to dd and quantity supplied increases from q to qs.