Question

Caviar (fish eggs) and champagne (alcoholic beverage) are complements. Recently pollution has been a problem in the Voga River, where much of the world's caviar originates. The sturgeon that live in these waters are laying fewer eggs than before. Explain the effects on the markets for caviar and champagne, respectively.

Answer 1

Here, it's mentioned that, champagne and caviar are complements. It means that champagne and caviar are conumed together or both are used in conjunction. Cross elasticity of demand between champagne and caviar is negative. If price of caviar increases, demand for champagne will fall.

Now let's look at the problem of pollution in voga river. As a result of pollution, stargeon is laying fewer eggs than before. It means that caviar population will be hit badly by pollution.

> Impact on caviar Market

*availability of caviars or supply of caviars will be fall. As a result price of caviars will increase as shown in the diagram.

As supply falls demand for supply curve shifts from SS to S1S1 . The new supply curve intersects Demand curve DD at E1. As a result quantity of caviars falls from Q (initial quantity ) to Q1 and price of caviars Increases from P (initial price) to P1

* Impact on the market for Champagne

As caviars and champagne are complements , a rise in the price of caviars Will lead to decline in demand for champagne.

It's shown in the following diagram.

As a result of decline in demand, demand curve shifts backward from DD to D1 D1. The new demand curve intersects supply curve SS at E1. Corresponding quantity is Q1 which is less than Q( initiative quantity determined the intersection of DD and SS at E) . Corresponding price is P1 which is also less than the initial price ( Determined by the intersection of SS and DD at E).