Question

(a) Draw a Supply Curve and the Demand Curve for the Milk market.

Label the supply S1 and the demand D1. Label the vertical axis P for Price and label the horizontal axis Q for Quantity of Milk. Label on the vertical axis the equilibrium price as P1. Label on the horizontal axis the equilibrium quantity as Q1.

Assume now that the price of Breakfast Cereals has increased by 200%.

(b) Would the Supply Curve for Milk increase, decrease or stay the same?

(c) If you said increase or decrease in (b), clearly show that change on the graph above and draw and label the new Supply as S2.

(d) Explain why the higher prices for breakfast cereals caused you to answer part (b) above the way you did.

(e) Would the Demand Curve for Milk increase, decrease or stay the same?

(f) If you said increase or decrease in (e), clearly show that change on the graph above and draw and label the new Demand as D2.

(g) Explain why the higher prices for breakfast cereals caused you to answer part (e) above the way you did.

h) Now, would the Equilibrium Price of Milk increase, decrease or stay the same?

If you said increase or decrease, clearly show that change on the graph above and label on the vertical axis the new equilibrium price as P2.

(i) Now, would the Equilibrium Quantity of Milk increase, decrease or stay the same?

If you said increase or decrease, clearly show that change on the graph above and label on the horizontal axis the new equilibrium quantity as Q2.

Answer 1