Question

Comparative Statics: Consider the market for Patriot T-Shirts. What will happen to the equilibrium price and quantity if the Patriots win the Super Bowl on Sunday and the price of cotton increases? After you perform comparative statics for each graph, determine the overall net effect on P* and Q*. Note, if you get conflicting results, e.g. Price increases and decreases, then the net result is indeterminate.

Answer 1

If Patiots win, then the demand for T shirts increase as a result of which the demand curve shifts to the right and with this, the equilibrium price and quantity increases. If the price of cotton increases, then production becomes more costly as a result of which the supply decreases as a result of which the supply curve shift to the left and this will increase the equilibrium price and decrease equilibrium quantity.

Because P* or the equilibrium price is increasing in both the cases there will be a net price increase

Because Q* or the equilibrium quantity is increasing in one occasion decreasing in the other the net effect is intermediate