Question

Please draw a supply and demand diagram for the “Market for Tom Jones Records” and answer the following questions (Label all axes and curves).

a. Assume Tom Jones records and wine are complements. Additionally, the price of wine decreases. Illustrate the effect of the price change on the Demand Curve for Tom Jones records.

b. Furthermore, the government enacts a Tom Jones tax (on the supply side). In other words, suppliers of Tom Jones records must now pay a tax per every unit sold. Illustrate the effect of the tax on the Supply Curve for Tom Jones records.

c. How do the changes in demand and supply affect equilibrium price P* and equilibrium quantity Q*? That is, do price and quantity rise, fall, or remain unchanged, or are the answers indeterminate because they depend on the magnitudes of the shifts?

Answer 1

C.

In the given scenario, price is going to increase for sure, as demand has increased and supply has decreased. But, new output level will depend upon degree of change in demand and supply. If demand increase is more than decrease in supply as B-1, then equilibrium quantity increases. If demand increase is less than decrease in supply as B-2, then equilibrium quantity decreases as shown, then equilibrium quantity decreases.