Question

1.    In each of the following cases, draw the supply and demand curves for the market indicated. Your drawings need not be perfectly to scale. After that, please show how the event indicated would affect the supply and/or demand curves. Clearly indicate the new and old equilibrium prices and quantities.

In one sentence please explain your reasoning.

A) Market: Bicycles

Event: Gasoline prices rise to $6.00 per gallon

B) Market: Bicycles

Event: Your university trustees vote to establish automobile parking fees of $1.00 per hour

C) Market: Bicycles

Event: Bicycle assemblers successfully lobby and receive a 50% pay raise

D) Market: Bicycles

Event: Events in (B) and (C) occur simultaneously

E)   Market: Automobiles

Event: Workers agree to a pay cut for the good of the company

F)   Market: Bicycles

Event: Because of expanded federal regulations, the price of bicycle helmets triples

G) Market: Bicycles

Event: The president decides that the best use of the budget surplus is to divide it up among the 8 – 20 year olds in the country

Answer 1

In each graph, price (P) and quantity (Q) of apples are measured vertically and horizontally respectively. D0 & S0 are initial demand and supply curves intersecting at point A with initial price P0 and quantity Q0.

(A) Increase in gasoline price will decrease the demand for automobiles and increase the demand for bicycles (which is a substitute), shifting the demand curve rightward, increasing both price and quantity. In following graph, D0 shifts right to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

(B) Implementation of automobile parking fees will decrease the demand for automobiles and increase the demand for bicycles (which is a substitute), shifting the demand curve rightward, increasing both price and quantity. In following graph, D0 shifts right to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

(C) Increase in wage rate will increase production cost and sellers will reduce output. Market supply will fall, shifting the supply curve leftward, increasing price and decreasing quantity. In following graph, S0 shifts left to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.

(D) Higher demand will shift demand curve rightward, increasing both price and quantity. Lower supply will shift supply curve leftward, increasing price and decreasing quantity. The net effect is a definite increase in price, but quantity may rise, fall or remain unchanged on basis of whether rightward shift in demand curve is higher than, lower than or equal in magnitude to the leftward shift in supply curve. In following graph, as D0 shifts to D1 & S0 shifts to S1, they intersect at point B with higher price P1, and quantity Q1 (which is higher since rightward shift in demand is higher than leftward shift in supply).

NOTE: As per Answering Policy, 1st 4 parts are answered.