Question

Consider the market for imported strawberries (from Canada) in the USA (characterized by negatively sloped demand and positively sloped supply) in conjunction with the following two events: Event I: Strawberry farmsin Canada have been multiplying; Event II: Incomes in the USA are on the rise. How do the two events affect, initially and simultaneously, Demand, Supply, Peand Qe? (2)Consider the market for electric cars in the USA (characterized by negatively sloped demand and positively sloped supply) in conjunction with the following two events: Event I: Electricity prices, electric car insurance premia, and sales taxes are all rising; Event II: Automation has been pushing production costs upwards. How do the two events affect, initially and simultaneously, Demand, Supply, Peand Qe? (3)Currently, demand elasticity for the product you produce is ep= -2 and you sell Q1=10 at P1=8. Your total cost is fixed at $4 per unit produced. A client would like to purchase Q2=15 at a lower price (P2). Compute P2 and determine if it would be profitable to satisfy your client. What range of prices would generate profit for you?

Answer 1

(1)

Increase in strawberry firms will increase market supply of strawberries, shifting its supply curve rightward, thus decreasing price and increasing quantity. At the same time, higher income in US increases the demand for strawberries, shifting its demand curve rightward, thus increasing price and increasing quantity. The net effect is a definite increase in quantity. But price may increase, decrease or remain unchanged on basis of whether rightward shift in demand curve is higher than, lower than or equal in magnitude to the rightward shift in supply curve.

In following graph, D0 & S0 are initial demand & supply curves for strawberries, intersecting at point A with initial price P0 and quantity Q0. As D0 shifts right to D1 & S0 shifts right to S1, they intersect at point B with higher quantity Q1. In the graph, rightward shift in demand is higher than rightward shift in supply, so price has increased to P1.

NOTE: As per Answering Policy, 1st question is answered.