RELATED MARKETS: Use completely labeled market models to show the impact of changes in supply and...

RELATED MARKETS: Use completely labeled market models to show the impact of changes in supply and demand on market equilibrium. Make sure to report your results and use directional arrows where appropriate.

Suppose that Valentine’s Day is coming up and a lot of people like to buy chocolate for their loved ones. If Godiva Chocolate is an inferior good, show what would happen in the market for Godiva Chocolate (only) if the economy is booming and incomes have been rising. (Assume that any effect from the holiday itself has already been taken into account.)

Now assume that Godiva Chocolate is used to produce chocolate covered strawberries and gourmet chocolate covered apples. Taking into account what happened to the price of Godiva Chocolate in the market above, what will happen in the market for Gourmet Chocolate Covered Fruits?

Expert Solution

a. As Govinda chocolate is an inferior good, which means that as the income level increases, demand for chocolate will decline. Now as economy is booming, this means income level in the economy will increase and as as Govinda chocolate is an inferior good, due to this boom, demand for chocolate will decline and the demand curve for Govinda chocolate will shift leftward from D1 to D2 and as the economy moves from point A to point B, the equilibrium price of chocolate will decline from P1 to P2 and the equilibrium quantity of Govinda chocolate will decline from Q1 to Q2.

b. Now from part a we have seen that the equilibrium price of Govinda chocolate falls due to an economic boom, now here as chocolate is an input to produce chocolate covered strawberries and gourmet chocolate covered apples, now as the price of input I.e chocolate declines, then cost of producing chocolate covered strawberries and chocolate covered apples will decline and hence the supply of chocolate covered strawberries and chocolates will increase and the supply curve will shift rightward from S1 to S2 and as the economy moves from point A to point B, the equilibrium price of chocolate covered fruits will decline from P1 to P2 and the equilibrium quantity of chocolate covered fruits will increase from Q1 to Q2.

Rahul Sunny answered 1 year ago

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