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

1).

Consider the market for the peanut. So, the following fig shows the market for peanut. So, “D1” and “S1” are the initial demand and supply curves respectively and “E” be the initial equilibrium the intersection of “D1” and “S1”, => the equilibrium “Q” and “P” are given by “q1” and “P1”.

Now, the technological break down leads to decrease in the supply of peanut, => the supply curve will shift to left side given the each price. So, the supply curve is given by “S2”. So, the new equilibrium is “E2” the intersection of “D1” and “S2”. So, here the equilibrium “Q” decreases to “Q2” and “P” increases to “P2”.

2).

Consider the following fig shows the market for “good X”. So, here the initial equilibrium is “E1” and the equilibrium “Q” and “P” are “q1” and “P1”.

Now, in the future the price of the good will fall, => people will decrease their demand today to purchase the good tomorrow, => the demand will decreases to “D2”, => the new equilibrium is “E2” and the corresponding “Q” and “P” are “Q2” and “P2”. So, as the demand decreases implied the equilibrium “P” and “Q” both decreases.

3).

Now, the 3^rd scenario, where “E1” be the initial equilibrium, => increase in income tax will decrease the income of people, => people will increase the demand for the inferior good, => the demand curve will shift to the right side to “D2”.

So, the new equilibrium is “E2”, => the equilibrium “Q” and “P” both increases of this fast food.