Question

Use short-run supply demand analysis to indicate how equilibrium price and quantity will change if the following changes occur in the economy. Draw a supply and demand curve for each answer and provide a brief one sentence explanation.

a) Potatoes are an inferior good, and national income falls as a result of a recession. What happens to the market for potatoes? (An inferior good is one in the demand for the good falls as income rises.

b) Peanut butter and jelly are complementary goods, and there is a rapid technological improvement in the production of peanuts. What happens to the market for jelly?

c) Immigration policy leads to a sharp reduction in the in-migration of Mexican workers. What happens to the market for low-wage labor in Los Angeles?

d) The government decides to make illegal the production and consumption of cigarettes. What happens to the market of cigarettes?

Answer 1