Question

In: Economics

Using supply-and-demand diagrams, show the effect of the following events on the market for MRI Scans...

Using supply-and-demand diagrams, show the effect of the following events on the market for MRI Scans (not machines). Indicate the change in equilibrium price and quantity. (Hint: Determine whether Demand or Supply is affected in each case)(10 pts)
1. The price of CT scans increases. Explain the relationship between MRI scans and CT scans.

The technology to produce MRI machines improves causing costs to go down.

Consumer income falls because of a recession.
1. The number hospitals in areas decreases due to the closure of some hospitals

Expert Solution

A) CT scan and MRI are Substitutes. Substitute goods are those which can be used in place of each other for satisfaction of a particular want. There exist a direct relationship between Change in price of one substitute good and change in quantity of another substitute good.

With a rise in price of CT scan the demand for MRI scan increases and demand curve shifts right from D to D1 and the Supply curve remains unaffected.

This happens because with a rise in price of CT scan MRI scan will become relatively cheaper as compared to CT scan and hence it's Demand will rise

The Equilibrium price rises from OP to OP1 and Equilibrium quantity also rises from OQ to OQ1.

B) Due to improvement in technology the cost of production falls and fall in the cost of production raises the profitability of the producers.

So,the Supply for MRI scan shifts right from S to S1 and the demand curve remains unaffected.

The Equilibrium price falls from OP to OP1 and the Equilibrium quantity rises OQ to OQ1

C) Normal goods are those in which there exist a direct relationship between income and demand.

If MRI scan is a normal good then with a fall in income the demand also falls.

The demand curve shifts left from D to D1 and the Supply curve remains unaffected.

The Equilibrium price falls from OP to OP1 and the Equilibrium quantity also falls from OQ to OQ1

D) Complementary goods are those which are used together for satisfaction of a particular want.

There exist an inverse relationship between Change in price of one complementary good and change in demand of another complementary good.

MRI scans and hospitals are complementary to each other .

With the closure of hospital the demand for MRI scan falls and the demand curve shifts left from D to D1 and Supply remains unaffected.

The Equilibrium price falls from OP to OP1 and Equilibrium quantity also falls from OQ to OQ1.

.

Rahul Sunny answered 1 year ago

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