Question

AP Macroeconmics

MAKE SURE TO LOOK AT THE BOLDED WORDS WHEN ANSWERING THEM

For each scenario below, Show what will happen on a supply and demand graph for each of the scenarios below and list the following information. All graphs should be properly labeled for full credit. Supply and/or Demand increase, decrease or stay the same. Determinant that causes the change (Ex resource cost, expectations, related goods etc) Price Increase or Decrease Quantity Increase or Decrease

Graph label: Market for bottles Scenario: People like drinking milk and juice equally. Milk is sold in cartons and juice is sold in bottles. A blizzard kills many of the cows in the midwest.

Graph label: Market for electric cars Scenario: Congress approves a consumer tax credit for purchasing an electric car at the same time that it increases regulations for the makers of electric cars.

Graph label: Hamburgers Scenario: Fast food companies collude to increase the price of hamburger sandwiches at all of their restaurants.

Answer 1

Scenario 1: Market for bottles

A blizzard kills many of the cows. This will affect the milk production as less milk will be produced. Thus people will buy more juice as they like both milk and juice equally. The demand for juice will increase and this will lead to more production of juice. The demand for bottles will increase as juices are sold in bottles. Thus, the cause of demand increase is the lower supply of the substitute good. This is shown below.

Scenario 2: Market for electric cars

A consumer tax credit for purchase of electric cars will make electric cars comparatively cheaper to consumers. Thus, demand for electric cars will increase. Increased regulation for electric car makers would make the production of cars costlier. Thus, producers will supply less. The supply of cars will decrease. The ultimate effect on price and quantity will depend on the strength of the two effects. In the diagram below, it is assumed that supply decreases more than the increase in demand.

Scenario 3: hamburgers scenario

If the fast food companies collude to increase the price of hamburger sandwiches, then the demand for hamburgers will decrease as it is now costlier to buy hamburgers and hamburgers are not necessary goods. The supply of the collusion remains unaffected due to collusion. However, the supply will adjust after the consumer demand is adjusted for price change.