Question

In: Economics

Assume that each of the markets below is initially in equilibrium. Then for each market below,...

Assume that each of the markets below is initially in equilibrium. Then for each market below, suppose that the indicated scenario occurs. Illustrate the effect of each event in a diagram and indicate the effects on the equilibrium price and quantity.

  1. Market: Rental homes. Scenario: Mortgages to own your own home are now easier to qualify for.
  2. Market: Beef. Scenario: A drought in Barbados has resulted in an increase in the price of cattle feed.
  3. Market: Bottled water in Indonesia. Scenario: An earthquake in Indonesia destroyed stores of bottled water and bottled water plants.
  4. Market: Hot Chocolate. Scenario: Protesting farmers dump millions of pounds of sugar, causing the price of sugar to rise.
  5. Market: Automobile. Scenario: Consumer income falls because of a recession.

Solutions

Expert Solution

In each case, D0 and S0 are initial demand and supply curves intersecting at point A with equilibrium price P0 and quantity Q0.

(a)

Easier mortgages will increase demand for mortgages, so demand for rental homes will decrease, shifting demand curve leftward, decreasing both price and quantity.

In following graph, D0 shifts left to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(b)

Higher price of cattle feed, an input, will increase production cost, which will decrease supply of beef, shifting supply curve leftward, increasing price and decreasing quantity.

In following graph, S0 shifts left to S1, intersecting S0 at point B with higher price P1 and lower quantity Q1.

(c)

Destruction of production facilities will decrease production, which will decrease supply of bottled water, shifting supply curve leftward, increasing price and decreasing quantity.

In following graph, S0 shifts left to S1, intersecting S0 at point B with higher price P1 and lower quantity Q1.

(d)

Higher price of sugar, an input, will increase production cost, which will decrease supply of hot chocolate powder, shifting supply curve leftward, increasing price and decreasing quantity.

In following graph, S0 shifts left to S1, intersecting S0 at point B with higher price P1 and lower quantity Q1.

(e)

Decrease in consumer income will decrease demand for car (assuming car is a normal good), shifting demand curve leftward, decreasing both price and quantity.

In following graph, D0 shifts left to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

Rahul Sunny answered 2 years ago
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