Question

Suppose there are only two laptop producers: Dell and Lenovo. Fundamental assumptions of supply and demand are that quantity demanded decreases when price increases while quantity supplied increases when price increases. Therefore, the demand curve has a negative slope and the supply curve has a positive slope. Let the Dell and Lenovo laptops be perfect substitutes for each other, meaning that whenever the price of a Dell laptop increases the demand for laptops made by Lenovo increases and vice-versa. Assume that both types of computers are normal goods. Initially, markets for both types of laptops are in equilibrium. In each of the following questions describe the change to the demand and the supply (this could be a demand shift, a supply shift, a change in the quantity demanded, and/or a change in the quantity supplied) for both types of laptops and explain how the equilibrium prices and quantities change compared to the initial equilibrium prices and quantities for these two types of laptops. Assume that before every change in the scenario the market price and quantity in both markets returns to equilibrium.

a) One of the Lenovo’s factories that makes 40% of their laptops was damaged by an earthquake and has to be closed for 6 months to repair the damage. As a consequence of this earthquake, many people lost their jobs in the Lenovo factory.

b) News spread out that Dell used cheap chips inside of their laptops and those chips are dangerous for people’s health. Consequently, consumers are now more willing to buy Lenovo laptops.

c) Dell has to change one of their input suppliers to a more expensive one because of a disagreement with their initial supplier of inputs. This change in input suppliers raises the cost of producing a Dell laptop.

d) For this question, consider only the market for Lenovo laptops. A new study ordered by the government finds that the adverse effect from laptop radiation is not nearly as harmful as from other electronic devices, so people are now willing to buy more laptops. The government wishing to cover the cost of the study has assessed a new tax on laptop producers that will cover the cost of the study.

e) Assume that Dell laptops are an inferior good and that Lenovo laptops are a normal good. Also, do not forget that consumers are indifferent between buying any of the two laptops, i.e. the two different brands of laptops are perfect substitutes for one another. Suppose the production costs for Lenovo as well as Dell laptops have increased. At the same time, the wealth of all consumers in these markets have increased. How will the equilibrium in both markets change?

Answer 1

a) The supply of lenevo decreases causing leftwards shift of supply curve. The price of Lenovo increases and quantity decreases. Dell being relatively cheaper its demand increases and demand curve shifts rightwards. At new equilibrium price of dellincreases and quantity of dell increases.

b) Demand for dell will decrease causing its price and quantity to fall. There will be subsequent increase in demand for lenevo causing demand curve to shift rightwards. At new equilibrium price and quantity of lenevo increases.

c) Increased cost of production of dell causes its supply to fall. The supply curve shifts leftwards to S’ and price increases and quantity falls. Lenovo being relatively cheaper its demand increaSes. Demand curve shufts to D’ and its price and quantity increases.

d) Increase in demand causes demand curve to shift rightwards to D’. With tax tge cost of production increases and supply curve shifts leftwards to S’. Assuming the magnitude if shift of both the curves being same the equilibrium price will be higher and there is no change in quantity. If supply falls by a lesser amount than the increase in demand the price will increase and quantity will increase. If magnitude of shift in supply is more than shift in demand the price will increase but quantity will fall.