Question

For each of the following cases a-e, you will use the Supply & Demand theory and model to determine what will happen to the equilibrium price (P*) and equilibrium quantity (Q*). Explain how you reach your conclusions by following the 4 steps below (in that exact order) for each case a, b,....: Be neat! Do not clump all your answers together.

1. Among all the variables/determinants that shift the curves, which variable(s) apply(ies) in this case? Only use variables introduced in this module.

2. Which curve(s) will shift? Will it increase or decrease?

3. What is the direction of the shift(s)?

4. Conclusion: what happens to P* and Q* (increases/decreases/ambiguous)

a. Market for Christmas trees. A severe drought hits the Mid-West and Christmas tree farms suffer from a huge loss of young trees, Ceteris Paribus.

b. Market for hot chocolate. The price of whipped cream, a complement to hot chocolate, increases and a better method of harvesting cocoa beans is introduced, Ceteris Paribus.

c. Market for I-Pads. A marketing strategy launched by the new Apple CEO, Tim Cook, proves to be very popular with consumers, Ceteris Paribus.

d. Market for solar panels. The cost of silicon photovoltaic cells used in manufacturing solar panels decreases, Ceteris Paribus.

e. Market for high-end day spas and hair salons. Many well-to-do consumers lose their jobs and have to give up luxuries, Ceteris Paribus.

Answer 1

A.Drought is the variable.Supply curve will shift to the left because the drought will lower the production. Price will rise and quantity will fall.

B.question unclear.

C.Marketing strategy is the variable.

Demand curve shifts to the right as marketing techniques draw more consumers.

Price and quantity both rises

D.Variable-silicon cells.

Supply curve shifts to the right as cost of production falls.

Price falls and quantity rises.

E.variable-losing jobs.

Demand curve shifts to the left because consumers don't have the ability to pay

Price and quantity falls.