Question

Question 5 (May -18)

For each of the following scenarios, use a supply and demand diagram to illustrate the effect of the given shock on the equilibrium price and quantity in the specified competitive market. Explain whether there is a shift in the demand curve, the supply curve or neither

1. An unexpected temporary heat wave hits Africa. Show the effect on the demand and price of bottled water
2. The government introduces a tax on water which is paid by producers. What is the effect on the bottled water market
3. Ethiopia and Nigeria are major producers of textiles. Workers in Ethiopia decide to go on a strike, show the effect on the market for Ethiopia textiles
4. Show the effect of the situation described in 3 on the market for Nigeria textiles
5. Suppose the government imposes a price cap on the bottled water. Show the effect in the bottled water market

Each discussion is 3 marks (1 mark for impact on the equilibrium price, 1 mark for impact on quantity and 1 mark for illustration on the demand and supply movement)

Answer 1

(A.) An unexpected temporary heat wave hits Africa. This would results in increase in equilibrium price and quantity of bottled water. It can be easily understand by the following diagram:

(B.) The government introduces a tax on water which is paid by producers. This results in decrease in supply of water. Which cause increase in equilibrium price but decrease in equilibrium quantity. It can be easily understand by the following diagram:

(C.) If Workers in Ethiopia decide to go on a strike. This results in decrease in supply of textiles. Which cause increase in equilibrium price but decrease in equilibrium quantity. This is illustrated in the diagram below:

In the market of Nigeria textiles, there is increase in equilibrium price and quantity of textiles. It can be easily understand by the following diagram:

(D.) If the government imposes a price cap on the bottled water, there is excess demand for bottled water at price cap. This is illustrated in the diagram below: