Question

The following graph shows the market for cereal in Philadelphia, where there are over 1,000 stores that sell cereal at any given moment. Suppose the Surgeon General issues a public statement saying that consuming cereal is good for your health.

Show the effect of th/s change on the market for cereal by shiting one or both of the curves on the following graph, holding all else constant.

Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, fust drag it a little farther.

Now suppose Congress passes a tax cut that increases the income of Philadelphia residents.

If cereal is a normal good, this will cause the demand for cereal to _______.

Answer 1

It shall be noted that the tax cut that results in the increase in the income of the Philadelphia residents is an external factor that influences the aggregate demand in the economy.

With the tax cut, the disposable income in the hands of the residents, increases. As a result, the consumption demand increases thereby leading to an economy-wide increase in the aggregate demand.

This is represented by the rightward shift in the aggregate demand curve.

Supply Price (Dollars per Box) New Demand due to tax-cut Demand Increase in quantity of Cereals due to rightward shift in Aggregate Demand curve due to tax-cut Quantity (Boxes)

Given the aggregate supply curve in the economy, a rightward shift in the aggregate demand curve would result in an increase in the equilibrium quantity and equilibrium price.

Thus, given cereal is a normal good, a tax cut that increases the income of the Philadelphia residents will cause the demand for cereal to increase.

Hence, the correct answer is increase