Question

Determine the effect upon equilibrium price and quantity sold if the following changes occur in a particular market:a. Consumers’ income increases and the good is normal.b. The price of a substitute good (in consumption) increases.c. The price of a substitute good (in production) increases.d. The price of a complement good (in consumption) increases.e. The price of inputs used to produce the good increases.f. Consumers expect that the price of the good will increase in the near future.g. It is widely publicized that consumption of the good is hazardous to health.h. Cost reducing technological change takes place in the industry.For each of the pair of events indicated below, perform qualitative analysis to predict the direction of change in either the equilibrium price or equilibrium quantity. Explain why the change is indeterminate.a. Both a and h conditions occur simultaneously.b. Both d and e conditions occur simultaneously.c. Both d and h conditions occur simultaneously.d. Both f and c conditions occur simultaneously.

Answer 1

Answer:

Explanation:

a. Consumer’s income increases and the good is normal. Equilibrium price stays same and quantity will rise

b. The price of a substitute good (in consumption) increases. Equilibrium price stays same and quantity sold will rise

c. The price of a substitute good (in production) increases. Equilibrium price stays same and quantity sold will rise

d. The price of a complement good (in consumption) increases. Equilibrium price rises and quantity sold will decline.

e. The price of inputs used to produce the good increases. Equilibrium price rises and quantity sold will decline.

f. Consumers expect that the price of the good will increase in the near future. Equilibrium price rises and quantity sold will also rise.

g. It is widely publicized that consumption of the good is hazardous to health. Equilibrium price declines and quantity sold will also decline.

h. Cost reducing technological change takes place in the industry. Equilibrium price declines and quantity sold will rise.

For each of the pair of events indicated below, perform qualitative analysis to predict the direction of change in either the equilibrium price or equilibrium quantity. Explain why the change is indeterminate.

a. Both a and h conditions occur simultaneously. This will raise the equilibrium since good is now cheaper to produce and consumer has more income to purchase it however effect on price will be dubious.

b. Both d and e conditions occur simultaneously. Equilibrium price rises and quantity will decline.

c. Both d and h conditions occur simultaneously. Dubious effect increase in price of complementary good and reduction in cost due to latest technology will offset each other’s effect and equilibrium will not change if the magnitude of both effects is the same

d. Both f and c conditions occur simultaneously Equilibrium price rises and Equilibrium quantity will also rise.