Question

1. Suppose the following events occur in the market for orange juice. In each case, graph both the supply and demand curves and show the shift that would occur. For each, briefly explain WHY the curve will shift in the direction graphed.

a. Consumer incomes decrease.

b. New technology decreases production costs.

c. The price of bacon decreases (assume bacon is a complementary good)

d. An additional per-unit tax is placed on sales of orange juice.

2. Suppose apple juice is a substitute good for orange juice.

a. Graph a Supply and Demand curve for orange juice. Label the equilibrium as P* and Q*.

b. Now suppose the price of apple juice decreases. In the above graph, show the resulting shift that would occur in the market for orange juice.

c. At the original price P*, would there now be excess demand or excess supply?

d. Would this cause the price of orange juice to increase or decrease?

e. As prices adjust what happens to the supply curve? Will producers produce more or less orange juice?

Thank you very much.

Answer 1

Please Note: "As per the guidelines can answer only one question at a time. Please post the other seperately to get a quick solution. Thanks!"

Q1.

Under normal circumstances:

(a)

The income of the consumer increases will eventually enable the customer to buy more. Therefore the demand will rise and shift towards the right.

(b)

Improvement in technology will lead to rise in productivity. Which basically means supplier can supply more. This will shift the supply curve to right.

(c)

Bacon and orange juice are consumed together. They are complementary goods since they are taken together. Hence price of bacon falls will cause the demand for orange juice to go up which will shift the curve to right.

(d)

Tax increase will make the cost of production to rise for the supplier which will shift the supply curve to left signalling fall in suppy.

Refer to attached graphs for shift in curves.

Thank You!