Question

In 2003, CNN reported that “researchers found that classical music […] was the most successful in encouraging people to part with their cash [in restaurants], with diners spending more than u$s 40 a head.” “With no background music, spending [in meals] fell to around u$s 35).”

a. Graphically show the market for restaurant food when no restaurant plays any music. Make sure you include demand and supply curves, and show the equilibrium price and quantity.

b. Now suppose that all restaurants start playing classical music, at no additional cost to the restaurant. How would the market for restaurant food look like after this change? Starting from the same diagram you drew in part (a), make sure you include demand and supply curves after the introduction of classical music, and show the new equilibrium price and quantity.

c. After complaints from the Recording Industry Association of America (the trade group that represents the U.S. recording industry), restaurants have to start paying for playing classical music during meals. Graphically show the effects in the market for restaurant dinners, and, separately, in the classical music market. Make sure you include demand and supply curves, and show the equilibrium prices and quantities in each market (one graph per market).

please show works

Answer 1

a. In the market for restaurant food, the initial equilibrium occurs at the point where demand for restaurant food and supply of restaurant food intersects. In the diagram below, DD represents the demand curve and SS represents the Supply Curve and initial equilibrium in the market for restaurant food occurs at point E1 where DD and SS intersects. At this equilibrium point, P1 represents the equilibrium price level and Q1 represents the equilibrium quantity in the market for restaurant food.

b. If the classical music is available at no additional cost in the restaurant, then this will increase the demand curve for classical music and quantity demanded of classical music will increase at each price level. This will shift the demand curve of classical music rightwards to D'D' and thus new equilibrium in the market for classical music occurs at point E2 where price of classical music has increased to P2 and equilibrium quantity of classical music has increased to OQ2. The increase in price also increase quantity supplied of classical music as there is rightward movement along the supply curve.

c. c. Due to payment being made for paying for classical music during the meals, the cost of production for the restaurant dinner will increase because classical music is a part of the production in the meal preparation of the firm. This will shift the supply of restaurants leftwards to S'S' and at new equilibrium point, equilibrium price has increased and equilibrium quantity in the market for restaurants will decrease.

On the other hand, in the classical music market, the change will lead to fall in demand for classical music and thus demand curve of classical music will shift leftwards to D'D' leading to decrease in equilibrium price and equilibrium quantity of classical music market.