Question

Question 3

Suppose Thailand is experiencing a severe drought and economic recession. Explain the possible impacts on the equilibrium price and quantity of pineapples in Thailand with diagrams.

Question 6

Suppose the Hong Kong government is going to impose a binding price floor on video games. Use a diagram to indicate and explain the changes in the selling price and quantity transacted of video games. Will all existing sellers of video games be better off? Explain.

Answer 1

(Question 3)

A drought will decrease the harvest of pineapples, lowering supply and shifting its supply curve leftward, increasing price and decreasing quantity. At the same time, a recession will lower consumer income, and assuming pineapple is a normal good, its demand will fall, shifting its demand curve leftward, decreasing both price and quantity. As a result, quantity will definitely fall, but net effect on price is uncertain. It may rise, fall or stay unchanged depending on magnitude of shifts in demand and supply curves.

In following graph, D0 & S0 are initial demand & supply curves intersecting at point A with initial price P0 & quantity Q0. As demand shifts left to D1 and supply shifts left to S1, they intersect at point B with lower quantity Q1 and new price P1, which is lower by drawing only.

(Question 6)

A binding price floor is imposed above free market equilibrium price. At higher price, quantity demanded will fall but quantity supplied will rise, leading to an excess supply (surplus). All existing sellers will not be better off since all of them will not be able to sell all their output at higher price.

In following graph, D & S are initial demand & supply curves intersecting at point A with initial price P0 & quantity Q0. As a price floor is imposed at Pf, quantity demanded falls to Qd but quantity supplied rises to Qs, leading to a surplus equal to (Qs - Qd).