Question

Suppose the following events occur in a particular market. Explain which shifter variable is affected, which curve shifts, and determine the effect upon equilibrium price and quantity sold. a. The price of a substitute good (in consumption) decreases. b. Consumers’ income increases and the good is inferior. c. Government regulators decide to outlaw a cost-reducing technological process in order to protect the environment. d. The price of a complement good (in production) increases. e. The price of inputs used to produce the good decrease. f. Consumers expect that the price of the good will fall in the near future. g. It is widely publicized that consumption of the good is helpful in preventing cancer.

THIS IS THE ONLY PART I NEED ANSWERED BUT YOU WILL NEED THE TOP QUESTION TO ANSWER: Suppose that a pair of events from problem 15 occur simultaneously. For each of the pairs of events indicated below, perform a qualitative analysis to predict the direction of change in either the equilibrium price or the equilibrium quantity. Explain why the change in one of these two variables is indeterminate. a. Both d and g in problem 15 occur simultaneously. b. Both b and e in problem 15 occur simultaneously. Draw the graphs.

Answer 1

In each graph, D0 and S0 are initial demand and supply curves intersecting at point A with initial price P0 and quantity Q0.

(a) Price of complement in production increases & It is publicized that consumption of the good is helpful in preventing cancer:

An increase in price of complement in production will increase the supply of the good in question, shifting its supply curve rightward, decreasing price and increasing quantity. At the same time, a positive health report will increase demand, shifting demand curve rightward and increasing both price and quantity. The net effect is a definite increase in quantity. But price may rise, fall or remain unchanged, depending on whether rightward shift in demand curve is higher than, lower than or equal in magnitude to the rightward shift in supply curve.

In following graph, D0 shifts right to D1 and S0 shifts right to S1, intersecting at point B with new price P1 and higher quantity Q1. In this graph, rightward shift in demand curve is higher than the rightward shift in supply curve, so P1 is higher than P0.

(b) Consumer income increases (inferior good) and price of inputs decrease:

Higher income will lower demand for inferior good, shifting demand curve leftward, decreasing both price and quantity. Decrease in input cost will lower production cost, so firms will increase production, increasing supply. The supply curve will shift rightward, decreasing price and increasing quantity. The net effect is a definite decrease in price. But quantity may rise, fall or remain unchanged, depending on whether rightward shift in supply curve is higher than, lower than or equal in magnitude to the leftward shift in demand curve.

In following graph, D0 shifts left to D1 and S0 shifts right to S1, intersecting at point B with lower price P1 and same quantity Q0. In this graph, leftward shift in demand curve is equal to the rightward shift in supply curve, so Quantity is unchanged.