Question

1. Consider the market for shoes in the following scenario. Suppose the cost of socks increases, use comparative statics to show what will happen to price and quantity in the shoe market. Does your result help explain why shoe companies often produce socks as well? Explain.

Answer 1

comparative static model in economics tells us about the comparision between the two equilibrium. in other words when a determinant of an equilibrium in demand and supply changes the equilibrium also changes and the new equilibrium is established in some other place.here the comparative static model tells us about the changes that has happend here or how the new equilibrium is different from the innitial one.

as we know shoe and socks are complemantary goods they are consumed together and not separately. so as in the case of complemantary goods if price of one increases the demand for its complement decreases and vice versa. here also as the price of socks increases the demand for shoes will decline and it will lead to the decline in prices of shoes. as we know price and supply are directly related, the decrease in price of shoes will lead to decrease in supply for the same as well. here by applying the comparative static model we can say the equilibrium will change as the supply will decline as aresult of decline in demand. so the new equilibrium will establishe at a point where the price of shoes and also the quantity supply will be lower than before.

as these products are consumed together the rise or fall in price of one will affect  the other so to have a control over the market conditions the companies often manufacture both shoe and socks together to not get affected much by the price change of any of the product from another manufacturer.