Question

1. Because bagels and cream cheese are often eaten together, they are complements.

a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What could be responsible for this pattern—a fall in the price of flour or a fall in the price of milk? Draw and explain your answer.

b. Suppose instead that the equilibrium price of cream cheese has risen but the equilibrium quantity of bagels has fallen. What could be responsible for this pattern—a rise in the price of flour or a rise in the price of milk? Draw and explain your answer.

Answer 1

1.

The demand for good is an inverse relationship between price and quantity. The equation of the demand curve gives the quantity demanded as a function of price. The graphical relationship between price and quantity demanded is depicted by the demand curve. Any point on the demand curve shows the quantity consumer demands for any particular price. The inverse demand curve is represents price as a function of quantity.

The supply for good is the direct relationship between price and quantity. The equation of the supply curve gives the quantity supplied as a function of price. The graphical relationship between price and quantity supplied is depicted by the supply curve. Any point on the supply curve shows the quantity producers supply for any particular price. The inverse supply curve represents price as a function of quantity.

The equilibrium is the point at which the quantity demanded by the consumer equals the quantity supplied by the producers at a particular price. It is the point of intersection between demand and supply curve.

The bagels and cheese are complements and hence consumed jointly. The increase in equilibrium quantity increases the equilibrium quantity of others. Any changes in one market ripple out to another. We assume that milk is an input of cheese and flour is of bagel.

a)

Consider the market for bagel and cheese given in the figure below

As the equilibrium quantity of bagels increases and price of cheese increases as well, then the following thing may have happen: the supply of bagels has increased. As a result the price of bagels falls. This rippled outto increasing demand for cheese, that in turn end up increasing the price of cheese.

This is illustrated in the figure above. Initially the market equilibrium quantity of bagels was qb. As the supply of bagels rises the supply curve shifted to Sb'. As a result the price of bagels falls and equilibrium quantity rises to qb'. Now as price of bagels falls and people buy more bagels, they buy more cheese to consume with it. This increases demand for cheese to Dc'. As demand rises, the price of cheese rises from pc to pc'.

Hence, the both quantity of bagels and price of cheese rises due to rise in supply of bagels. the supply could increase due to many factors including change or fall in price of its inputs. As flour is input to bagels. The phenomenon described could be due to fall in price of flower.

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b)

Consider the market for bagel and cheese given in the figure below

As the equilibrium quantity of bagels decreases and price of cheese increases as well, then the following thing may have happen: the supply for cheese has decreased. As a result the price of cheese rises. This rippled out to decreasing demand for cheese, that in turn end up decreasing the price of cheese.

This is illustrated in the figure above. Initially the market equilibrium quantity of bagels was qb and that price of cheese was pc. As the supply of cheese rises the supply curve shifted to Sc'. As a result the price of cheese rises and equilibrium quantity falls. Now as price of cheese increases and people buy less cheese, they buy less bagels to consume with it. This decreases demand for bagels to Db'. As demand falls, the quuantity of bagels falls from qb to qb'.

Hence, the both quantity of bagels decreases and price of cheese rises due to fall in supply of cheese. The supply could decrease due to many factors including change or rise in price of its inputs. As milk is an input to cheese. The phenomenon described could be due to rise in price of milk.