Question

1.Given the following solutions, define if price equilibrium and quantity equilibrium increase or decrease as well as graph each of them in relation to the market for coke:

a) bad weather wreaks havoc with corn crop (main ingredient for coke)

b) the price of Pepsi (a substitute) rises dramatically:

c) increase in the umber of coke suppliers in the market

Answer 1

Answer 1

(a) Bad weather wreaks havoc with corn crop. This will result in decrease in supply of corn and hence supply of corn will shift to the left and demand of corn remains same. This will result in increase in price of Corn.

Price of corn increases and corn is a main input for coke => Cost of an input increases => Supply of Coke will decreases and hence will shift to the Left.

Supply of Coke shifts towards the left and demand remains same => Equilibrium Price of Coke will Increase

As Pepsi is a substitute good for Coke, hence If price of Pepsi increases consumers will shift from Pepsi to coke and hence at given price level more coke will be demanded and hence demand of coke will shift to the right which results in increase in Price level.

(c)

Increase in the umber of coke suppliers in the market will results in more quantity will be supplied at given price level and hence supply will shift to the right and this will result in decrease in price of coke.