Question

Using graphs of supply and demand and a brief written explanation, analyze the effect of each of the following on the price and quantity of dog food sold in the U.S. State whether price and/or quantity unambiguously increases or decreases. Label the original equilibrium price and quantity Po and Qo and the new equilibrium Pn and Qn. 

a. Income rises and dog food is an inferior good. 

b. A new breeding technique is introduced which dramatically reduces the price of a dog. 

c. Because of the great profits to be made, a number of new companies start producing dog food at the same time that the demand for dog food is increasing. 

d. The government imposes a price ceiling on the price of dog food at the current equilibrium price and then the price of beef by-products (an input in making dog food) increases.

Answer 1

In the above figures x-axis shows quantity and y- axis shows price . D is the demand curve and S is the supply curve. Panel A.B,C and D shows the following effects respectively.

.a). Income rises and dog food is an inferior good., the demand for dodg food reduces, the demand curve shift to the left. The price reduces fro p0 to pn and quantity also reduces from q0 to qn.

b). Dog and dog food are complementary good. reduce in the price of one commodity increases the demand for its complement. The demand curve shift to the right. The price increases from p0 to pn and quantirty also increases from q0 to qn.

c). Because of the great profits to be made, a number of new companies start producing dog food at the same time that the demand for dog food is increasing, The demand and supply curves shift to the right. The price is uncertain because the magnitudes of the shifts are unknown. The quantity increases from q0 to qn.

d). The government imposes a price ceiling on the price of dog food at the current equilibrium price and then the price of beef by-products increases. The supply increases, the supply curve shift to the right. The price is remaining the same(price ceiling) , the quantity supplied increases from q0 to qn. The quantity demanded remains the same.