Question

Consider the market for cell phones. For the following events, use Supply and Demand analysis to predict changes in equilibrium price and quantity of cell phones.
a. The American Cancer Society announces scientific proof linking cell phone usage to cancer.
b. The stock market soars, causing a rise in the general income of consumers.
c. More efficient robots are developed and used on the cell phone assembly lines.
d. The price of a cell phone increases.
e. Consumers expect the price of cell phones to decrease next week.
f. The price of a cell phone service plan increases.
g. The price of a tablet computer (a substitute in production) increases.
h. The price of a cell phone case (a complementary good) decreases. At the same time, a trade dispute causes shipments of inputs used in cell phone production to be severely delayed.
i. The United Nations establishes and enforces a global minimum wage at $12.50 per hour

Answer 1

a. This would discourage consumers from using cellphones so demand decreases. This would reduce the

equilibrium price and reduce the equilibrium quantity.

b. Since income of consumers is increased and cellphones are normal goods, their demand increases. This

would raise the equilibrium price and raise the equilibrium quantity.

c. Increased efficiency would raise productivity and this causes the supply to increase. This would reduce the

equilibrium price and increase the equilibrium quantity.

d. This brings an upward movement along the demand curve and the supply curve so that quantity of

cellphones demanded falls and quantity supplied rises, generating a surplus

e. Lower future price expectations would result in postponing the buying decision. This implies that now, the

demand decreases. This would reduce the equilibrium price and reduce the equilibrium quantity.

f. This is a complementary service so when it is expensive, it is demanded less and so the demand for

cellphone decreases. This would reduce the equilibrium price and reduce the equilibrium quantity.

g. Expensive substitute encourages consumers to move to the market for given good. In this way for the

cellphones, the demand increases. This would raise the equilibrium price and raise the equilibrium quantity.

h. The price of a cell phone case (a complementary good) decreases so the demand for cellphone decreases.

This would reduce the equilibrium price and reduce the equilibrium quantity. At the same time, a trade dispute

causes shipments of inputs used in cell phone production to be severely delayed so the supply

of cellphone decreases. This would raise the equilibrium price and reduce the equilibrium quantity. Together if

the size of the shifts is same, equilibrium price rises while quantity remains unchanged.

i. If the market wage is less than this wage rate, employment falls and cost of production rises so the supply

of cellphone decreases. This would raise the equilibrium price and reduce the equilibrium quantity.