Question

2. Suppose apple juice is a substitute good for orange juice.

a. Graph a Supply and Demand curve for orange juice. Label the equilibrium as P* and Q*.

b. Now suppose the price of apple juice decreases. In the above graph, show the resulting shift that would occur in the market for orange juice.

c. At the original price P*, would there now be excess demand or excess supply?

d. Would this cause the price of orange juice to increase or decrease?

e. As prices adjust what happens to the supply curve? Will producers produce more or less orange juice?

Answer 1

a) The original demand and supply curves are as follows:

b. The decrease in the price of apples makes the consumer shift his preferences towards apples, reducing the equilibrium quantity and prices to Q2 to P2 respectively due to the leftward shift of the demand curve for oranges.

c. At the original price, there would be an excess supply of oranges as demand has fallen below the original equilibrium level.

d. The price of orange juice will decrease as seen from the figure.

e. As the price falls due to shift of the demand curve, the producers will adjust their supply to the new equilibrium. Therefore, the quantity supplied will decrease.