Question

Assume: You are in the market for compact discs. You know that… 1. Musicians accept lower royalties. 2. Compact disc players become cheaper. 3. More firms start producing music compact discs. 4. Music lovers experience an increase in income, and compact discs are normal goods. Assignment: • Start by drawing a graph that represents the market for compact discs. Clearly label all parts of the graph including all axes and curves. • Show how each assumption above would shifts the supply curve or the demand curve. Clearly label all shifts and identify any new equilibrium. • All assumptions above take place simultaneously. Explain what your model predicts would happen to equilibrium price and equilibrium quantity.

Answer 1

Assume: You are in the market for compact discs. You know that… 1. Musicians accept lower royalties.

Cost of production will go down and hence supply will shift to right(S1 TO S2), price of CD will go down (P1 TO P2)and quantity will increase(Q1 TO Q2).refer fig. 1.

2. Compact disc players become cheaper.

CD players are complements and hence demand for Cds will increase and shift to right, price will increase and quantity will increase.Refer fig. 3

3. More firms start producing music compact discs. : The supply curve will shift to right and price will come down and quantity will increase. Refer fig. 1

4. Music lovers experience an increase in income, and compact discs are normal goods. Refer fig. 3

(Figure 2 and 4 are given for reference)

As Cd is normal good demand curve will shift right and price and quantity will increase.