Question

Answer each of the following questions. When graphs are necessary it must be fully labeled and identify shifting factors and equilibrium changes to receive credit. If you think neither Supply nor Demand is affected, or that two different answers are possible, make sure to explain why you chose your answer. Any portion of a question that asks for an explanation should be approx. 5-6 sentences

Market research has found that wine is a strong complement to cheese. Based on this fact, if the price of cheese increased, what should we anticipate to happen to the market for wine? How does the change from the previous sentence impact the market for grapes, given that grapes are the key ingredient for wine? How, in turn, does this change to grapes impact the market for grape juice (another product made from grapes)? As a result of this outcome, what affect can we anticipate on the market for apple juice?

** Note: This question is challenging. You will need to create a separate Supply and Demand curve for each product. Address each of the connections in order (wine, grapes, grape juice and apple juice), the answer to the previous graph will give you information needed for the next item.

o From the article, “Buy Condo, Then Add Parking Spot for $1 Million”:

Using two separate Supply and Demand graphs, describe how different factors are contributing to the price for parking in Soho. One graph should identify (citing specifics from the article) a Demand Curve influence, and explain the outcome of price and quantity demanded as a result of the change. Do the same on a separate graph that identifies a Supply Curve influence.

In what ways are the two influences working in cohesion? In what ways are they pulling outcomes in opposite directions? Explain.

o From the article, “To Understand a Tax on Mexican Imports, Consider the Avocado”:

The article identifies that the price of some items may fall. Show with a properly labeled Supply and Demand curve the two ways in which a price can decrease. Label the graph as “Other Item”. What, generally, must be true of the relationship between Avocados and Other Item in each graph? Explain.

** Note: I'm not looking for you to make up a specific scenario but rather identify what must be true of any possible explanation.

Answer 1

WHEN THE PRICE OF CHEESE IS RAISED, THE DEMAND FOR CHEESE WILL FALL GIVEN THE FACT THAT DEMAND OF CHEESE IS INVERSELY RELATED TO THE PRICE OF CHEESE, OTHER FACTORS REMAINING CONSTANT. NOW, IF CHEESE AND WINE ARE COMPLEMNETS TO ONE ANOTHER THEN THE DEMAND FOR WINE ALSO FALL. THUS IN THE MARKET FOR WINE, THE DEMAND WOULD SHRINK, INDICATING A LEFTWARD SHIFT OF THE DEMAND CURVE FOR WINE. THUS THE EQUILIBRIUM PRICE AND THE EQUILIBRIUM QUANTITY OF WINE WOULD FALL AS SHOWN IN THE FIGURE 1.

AS GRAPE IS USED AS AN INPUT IN THE WINE PRODUCTION, THE FALL IN THE DEMAND FOR WINE WILL AFFECT THE SUPPLY FOR GRAPES ADVERSELY. AS THE DEMAND FOR WINE FALLS, THE EQUILIBRIUM PRICE FOR WINE FALLS AS WELL. THIS DEMOTIVATES THE SUPPLIERS OF GRAPES TO PRODUCE GRAPES. THUS THE SUPPLY OF GRAPES WILL FALL INDICATING A LEFTWARD SHIFT OF THE SUPPLY CURVE. THIS WILL LEAD TO A FALL IN THE SUPPLY OF GRAPE JUICES, RAISING THE EQUILIBRIUM PRICES FOR GRAPE JUICES AS SHOWN IN THE FIGURE 2.

THE INCREASE IN THE PRICE OF GRAPE JUICES WILL ALTER THE TASTES OF CONSUMERS AS GRAPE AND APPLE JUICES ACT AS SUBSTITUES. THE DEMAND FOR APPLE JUICES WILL RISE WHEREAS THE DEMAND FOR GRAPE JUICES WILL FALL WITH THE RISE IN THE RELATIVE PRICE OF GRAPE JUICE AS SHOWN IN FIGURE 3.

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