Question

Question 5

A) Suppose the demand for coffee depends on the following factors:

- It's own price.

- The price of substitute goods (for example, tea).

- The price of compliment goods (for example, cream and sugar).

- Income of consumers.

- Personal taste (preferences).

Suppose that after a regression analysis was conducted, it was determined that the demand for coffee has increased (ie. Shifted to the right). Explain what may have caused this increase in demand in reference to the factors given.

B) Suppose there is a new innovative technology that decreases the cost of production of coffee. Describe how this technology affects the equilibrium in the S-D model (assume there is already an equilibrium for the coffee market established before the technology, and how the innovation affects the equilibrium).

C) Now suppose both the increase in demand from A) and the innovation from B) occur at the same time. Will either P or Q be unambiguously larger or smaller than the equilibrium before each effect takes place? How do you know?

Answer 1

A) when price of substitue good increases, price of complimentary good decreases, income of consuner increases and favourable change of taste and preference, all factor shifts the demand curve rightward leading to increase in price.

B) Decrease in cost of production will shift the supply curve rightward leading to increase in supply at each price level.

In D-S dig. Equilibrium price will decrease and quantity will increase.

C)Eqm quantity will imcrease but equilibrium price is ambigous.

When Increase in supply>Increase in demand then price decreases

When increase in supply=increase in demand then price remains same

When increase in supply<increase in. Demand then price increases.

All dig. Are shown below.