Question

Here are 3 scenarios. Use the information provided in each scenario to answer the questions.

Scenario 1: You are studying the market for peanuts. Suppose there is a major technological breakdown in peanut harvest techniques, and the rate of harvest decreases significantly.

- Discuss whether you would see a change in D, S, Qd or Qs, and also the direction of the change (increase or decrease).

- What would you expect would happen to the equilibrium price and the equilibrium quantity of peanuts?

Scenario 2: You are studying the market for Product X, which is a luxury good. Suppose there is an economic survey that shows that prices for Product X are expected to decrease in the near future.

- Discuss whether you would see a change in D, S, Qd or Qs, and also the direction of the change (increase or decrease).

- What would you expect would happen to the current equilibrium price and the current equilibrium quantity of Product X?

Scenario 3: You are studying the market for a certain type of fast food, which has been determined to be an inferior good. Suppose there is an increase in income tax rates (across all income brackets).

- Discuss whether you would see a change in D, S, Qd or Qs, and also the direction of the change (increase or decrease).

- What would you expect would happen to the equilibrium price and the equilibrium quantity of this particular fast food?

Answer 1

(Scenario 1)

A decrease in rate of harvest will decrease the production of peanuts, lowering market supply. The supply curve will shift toward left, which will increase equilibrium price and decrease equilibrium quantity.

(Scenario 2)

A decrease in expected future price will make consumers demand less of the good now (in order to buy the good in future at lower price), which will reduce market demand. The demand curve will shift toward left, which will decrease equilibrium price and decrease equilibrium quantity.

(Scenario 3)

An increase in income tax rate will decrease the disposable income of consumers. Since the good is inferior, lower disposable income will increase its demand. The demand curve will shift toward right, which will increase equilibrium price and increase equilibrium quantity.