Consider the market for bicycles. Describe and draw what happens to the market if the following...

Consider the market for bicycles. Describe and draw what happens to the market if the following events occur. Note, you will want to draw three diagrams and give explanations for each.
The price of tire pumps increases
A study is published that links exercise to reduced risks of cancer
The price of the steel used in bike frames become more expensive

Expert Solution

Diagrams attached below after explantation

1. Tire pump and bicycles are related goods. If the price of tire pumps increases, then the demand for bicycles may decrease and thus the demand curve for bicycles will shift inwards. (This is because consumers find it expensive to fix their bicycle tires with the help of tire pumps). Due to this, the equilibrium quantity and price in the market will fall as indicated in the graph below. (Note: If one argues that tire pumps have no relation to bicycles at all, then there will be no changes in the demand/supply for the market of bicycles)

2. The publication means that cycling is a good form of exercise and will help reduce the risk of cancer. Thus, the demand for bicycles will increase (shift out) if a study is published that links exercise to reduced risks of cancer. Therefore, the equilibrium quantity and price increases.

3. This is the case of compliments (implying that the price of the complement and the quantity demanded of the good are inversely related) since steel is used in bike frames. If the price of this frame increases, then the overall price for bicycles would increase thereby reducing the demand for bicycles. This will lead to an inward shift of the demand curve in the market for bicycles. Therefore, the equilibrium quantity and price decreases.

Rahul Sunny answered 2 years ago

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