Question

In: Economics

A) A drought kills off some potato crops. Use a supply and demand graph, provide a...

A) A drought kills off some potato crops. Use a supply and demand graph, provide a brief explanation and indicate what happens to the following: -The market for potatoes. -The market for French fries. -The market for ketchup. -The market for rice. B) Explain the difference between a change in demand and a change in quantity demanded. Use two of the examples from part A to illustrate the difference. C) The government is considering imposing a new law to improve health that French fries have to be sold for at least $4. (this question is unrelated to part A) -In order to be binding would this be a ceiling or floor? -Use a supply and demand graph to explain the impact of this policy. Use both positive and normative analysis and describe the pros and cons of the policy.

Solutions

Expert Solution

(A)

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

(1) Market for potatoes:

A destruction of crop will lower the market supply of potatoes, shifting its supply curve leftward to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.

(2) Market for french fries:

An increase in price for potatoes, an input to french fry production, will increase input price, which will cause the sellers to lower production. This will lower the market supply of french fries, shifting its supply curve leftward to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.

(3) Market for ketchup:

French fries and ketchup being complements in consumption, an increase in price of french fries will decrease the demand for ketchup, shifting its demand curve leftward to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(4) Market for rice:

Rice and potatoes being substitutes in consumption, an increase in price of potatoes will increase the demand for rice, shifting its demand curve rightward to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

NOTE: As per Answering Policy, 1st question is answered.

Rahul Sunny answered 2 years ago
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