Currently the tea market is in equilibrium at price $4.00 per bag of tea and 100,000...

Currently the tea market is in equilibrium at price $4.00 per bag of tea and 100,000 bags of tea. Now, suppose the price of coffee decreases by 10%. This will lead to a 25% change in the equilibrium price of tea. The Price Elasticity of Demand (Ed) for Tea has been calculated to be 1.20 and the Price Elasticity of Supply for Tea has been calculated to be 0.90. Answer the following questions based on these events and facts.

(a) Will the Supply of Tea increase, decrease or stay the same? Please explain the reasoning for your answer?

(b) Will the Demand for Tea increase, decrease or stay the same? Please explain the reasoning for your answer.

(c) Determine the new Equilibrium Price of Tea. Show how you got your answer.

(d) Using the Definition Formula for the Price Elasticity of Demand (Ed) and/or the Definition Formula for the Price Elasticity of Supply (s) determine the new Equilibrium Quantity of Tea. Please clearly show your work.

Expert Solution

a) The supply will have no direct effect, niether it will decrease or increase ,as the supply determinants of a good are cost of production , number of suppliers , state of technology, government subsidies ,weather condition and availability of workers .... In these the price of substitute goods play no role thereafter with rise or fall in price of substitute good the supply of other will have no effect

b) However,unlike the supply the demand will definately get effected . Coffee being a substitute good for tea is now available at cheaper rate this will decrease the demand for tea and increase the demand for coffee. As fall in price of substitute good rise it's demand and decrease demand of the other good

c) As per question ,with fall in price of coffee the equilibrium price of tea has fallen by 25% i.e (old price multiply by change percent ; then old price minus percent change price = new price) old price = 4 × 25% = 1 ,then $4- $1 = $3 which is new equilibrium price of tea.(shown in pic uploaded)

d) as per price elasticity of demand = change in quantity demand ÷ percent change in price of good ( as done in pic uploaded)

Kindly please rate the answer and do feel free to ask doubts

Rahul Sunny answered 1 year ago

1. Currently the market for coats has an equilibrium price of $50 and the market for...

1. Currently the market for coats has an equilibrium price of $50 and the market for buttons has an equilibrium price of $2. a) Suppose the price of zippers increases. Draw both the market for coats and the market for buttons. Explain how the change in the price of zippers affects the market for coats and buttons. Draw each market showing the changes you described and be specific about what happens to price in quantity in both markets (4 points)...

Assume that the price in a market is currently below the equilibrium price. Explain exactly why...

Assume that the price in a market is currently below the equilibrium price. Explain exactly why that situation will change by putting the steps in the correct order. 1) the steps repeat until there is a new equilibrium 2) Some buyers are willing to pay more for a good and sellers can raise prices while still selling all of their supply 3) prices begin to rise 4) quantity demanded begins to decrease and quantity supplied increases 5) the shortage becomes...

The equilibrium price in this market is _ per shirt, and the equilibrium quantity is _ shirts bought and sold per month.

The equilibrium price in this market is _______ per shirt, and the equilibrium quantity is _______ shirts bought and sold per month. Complete the following table by indicating at each price whether there is a shortage or surplus in the market, the amount of that shortage or surplus, and whether this places upward or downward pressure on prices.

Suppose the market for frozen orange juice is in equilibrium at a price of $2.00 per...

Suppose the market for frozen orange juice is in equilibrium at a price of $2.00 per can and a quantity of 4200 cans per month. Now suppose that at a price of $3.00 per can, quantity demanded falls to 3000 cans per month and quantity supplied increases to 4500 cans per month. Draw the appropriate diagram for this market. Calculate the price elasticity of demand for frozen orange juice between the prices of $2.00 and $3.00. Is the demand elastic...

A quality characteristic of interest for a tea-bag-filling process is the weight of the tea in...

A quality characteristic of interest for a tea-bag-filling process is the weight of the tea in the individual bags. The label weight on the package indicates that the mean amount is 5.465.46 grams of tea in a bag. Problems arise if the bags are underfilled or if the mean amount of tea in a bag exceeds the label weight. The accompanying data are the weights, in grams, of a sample of 5050 tea bags produced in one hour by a...

A quality characteristic of interest for a tea-bag filling process is the weight of the tea...

A quality characteristic of interest for a tea-bag filling process is the weight of the tea in the individual bags. In this example, the label weight on the package indicates that the mean amount is 5.5 grams of tea in a bag. If the bags are underfilled, two problems arise. First, customers may not be able to brew the tea to be as strong as they wish. Second, the company may be in violation of the truth-in-labeling laws. On the...

Explain Market equilibrium, equilibrium price, and equilibrium quantity

Market rent is currently $50/sqft per year for 100,000 sqft. Market rent increases 2% annually. Vacancy...

Market rent is currently $50/sqft per year for 100,000 sqft. Market rent increases 2% annually. Vacancy is 7% of PGI each year. Operating expenses are $30/sqft per year and increasing by 3$ annually. Create the pro forma cash flow statement for the next five years showing PGI, EGI, and NOI.

1) Imagine a perfectly competitive market that is currently in a long-run equilibrium with price=$10, individual...

1) Imagine a perfectly competitive market that is currently in a long-run equilibrium with price=$10, individual firm quantity set at 10 units, and 100 active firms. Scientific discoveries about the health benefits of this good lead to a permanent increase in demand for this good (but no changes in firm costs). Once the market is able to fully adjust, then compared to the original long-run equilibrium, the new long-run equilibrium will have A) a lower price and fewer active firms...

Hi-Grade Regulator Company currently has 100,000 shares of common stock outstanding with a market price of...

Hi-Grade Regulator Company currently has 100,000 shares of common stock outstanding with a market price of $60 per share. It also has $2 million in 6 percent bonds. The company is considering a $3 million expansion program that it can finance with all common stock at $60 a share (option 1), straight bonds at 8 percent interest (option 2), preferred stock at 7 percent (option 3), and half common stock at $60 per share and half 8 percent bonds (option...

Question