Question

In: Economics

O1. What will happen to the market equilibrium price and quantity for the following situation? Explain...

O1. What will happen to the market equilibrium price and quantity for the following situation? Explain your answer using the graphs.

  1. The effect of a decrease in incomes on the market for secondhand vehicles
  2. The effect of a governmental subsidy on the market for AIDS research
  3. The effect of a decline in the price of irrigation equipment on the market for corn
  4. The effect of a decline in the price of personal computers on the market for software
  5. The effect of an increase in the price of GMC car on the market for Land cruiser

Solutions

Expert Solution

In each graph, D0 and S0 are initial demand and supply curves intersecting at point A with initial price P0 and quantity Q0.

(a) Decrease in income will decrease demand for secondhand vehicles, its demand curve leftward to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(b) The subsidy effectively lowers the cost of AIDS research, so medicine producers increase production of AIDS drugs, increasing market supply of AIDS drugs, which will shift its supply curve rightward to S1, intersecting D0 at point B with lower price P1 and higher quantity Q1.

(c) Lower equipment price will decrease irrigation cost, lowering production cost for corn, increasing market supply of corn, which will shift its supply curve rightward to S1, intersecting D0 at point B with lower price P1 and higher quantity Q1.

(d) Computers and software being complements, lower price of computers will increase the demand for software, shifting its demand curve rightward to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

(e) GM cars and Landcruiser being substitutes, higher price of GMC will increase the demand for Landcruiser, shifting its demand curve rightward to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

Rahul Sunny answered 2 years ago
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