Question

14. Another supply and demand puzzle

The market price of cheeseburgers in a college town increased recently, and the students in an economics class are debating the cause of the price increase. Some students suggest that the price increased because several burger joints in the area have recently gone out of business. Other students attribute the increase in the price of cheeseburgers to a recent increase in the price of calzones at local pizza parlors.

Everyone agrees that the increase in the price of calzones was caused by a recent increase in the price of pizza dough, which is not generally used in making cheeseburgers. Assume that burger joints and pizza parlors are entirely separate entities that is, there aren't places that serve both cheeseburgers and calzones.

1. The first group of students thinks the increase in the price of cheeseburgers is due to the fact that several burger joints in the area have recently gone out of business.

On the following graph, adjust the supply and demand curves to illustrate the first group s explanation for the increase in the price of cheeseburgers.

I don't have the graphs because I don't know how to input it onto the question but I would like to know the change for each graphs supply and demand lines either to the left or right.

2. The second group of students attributes the increase in the price of cheeseburgers to the increase in the price of calzones at local pizza parlors.

On the following graph, adjust the supply and demand curves to illustrate the second group's explanation for the increase in the price of cheeseburgers.

3. Suppose that both of the events you analyzed above are partly responsible for the increase in the price of cheeseburgers. Based on your analysis of the explanations offered by the two groups of students, how would you figure out which of the possible causes was the dominant cause of the increase in the price of cheeseburgers?

A) If the price increase was small, then the supply shift in the market for cheeseburgers must have been larger than the demand shift.

B) If the equilibrium quantity of cheeseburgers increases, then the demand shift in the market for cheeseburgers must have been larger than the supply shift.

C) If the equilibrium quantity of cheeseburgers increases, then the supply shift in the market for cheeseburgers must have been larger than the demand shift.

D) Whichever change occurred first must have been the primary cause of the change in the price of cheeseburgers.

Answer 1

1. According to the first group of students, a decrease in supply caused increase in price as shown in the following graph. Price Of Cheeseburgers S2 Si Demand Quantity of cheeseburgers, g 2. The second group of students thinks that the demand for cheeseburgers increased as the price of calzones (which is a substitute) ncreased, and this increase in demanded caused the price of cheeseburgers to rise, as shown in the following graph Price So Di Do 0, Quantity, O 3. The correct answer is B. Both the causes increase the equilibrium price. But the decrease in supply decreases the equilibrium quantity and the increase in demand increases the equilibrium quantity. Therefore, if the equilibrium quantity has increased, we can conclude that rise in demand was the dominant cause of increase in price. If the equilibrium quantity has fallen, we can conclude that fall in supply is the dominant cause oI increase in price