Question

In the past year, the price of dry-cleaning solvent doubled. More than 4,000 dry cleaners across the United States disappeared as budget-conscious consumers cut back. This year the price of hangers used by dry cleaners is expected to double. Source: CNN Money, June 4, 2012 Please answer the following questions in graph(S-D Curve) !!!!!!!!! show in a graph for each!!!!!!!

a. Explain the effect of rising solvent prices on the market for dry cleaning. show in graph.

b. Explain the effect of consumers becoming more budget conscious along with the rising price of solvent on the price of dry cleaning.show in graph.

c. If the price of hangers does rise this year, do you expect additional dry cleaners to disappear? Explain why or why not. show in graph.

Answer 1

In the past year, the price of dry-cleaning solvent doubled. More than 4,000 dry cleaners across the United States disappeared as budget-conscious consumers cut back. This year the price of hangers used by dry cleaners is expected to double.

a. When the price of solvent increases the dry claning becomes costlier and hence the dry cleaners can supply only fewer dry cleaning, this decreases the supply and hence supply curve shifts left from S to S1 as can be seen from the part a of the figure. As a result of decrease in supply the equilibrium price increases from P to P1 and quantity decreases from Q to Q1.

b. In part b of the figure we can see the effect of consumers becoming more budget conscious along with the rising price of solvent on the price of dry cleaning. When price increases due to decrease in supply, consumers demand less of dry cleaning as their budget is limited this shifts the demand curve from D to D1 and hence equilibrium price comes down to P and Quantity further decreases from Q1 to Q2.

c. If the price of hangers does rise this year, this will further increase the cost of dry cleaning but less as compared to increase in price of solvent. This will shift the supply curve from S to S1 as shown in part c of the figure and hence the Price will increase to P1 and quantity will decrease from Q to Q1.