Suppose there is a linear downward-sloping demand curve and a linear upward-sloping supply curve for some...
Suppose there is a linear downward-sloping demand curve and a linear upward-sloping supply curve for some good. The price of a substitute good decreases and the price of an input to the production process also decreases. Both changes occur simultaneously. Graph the original demand and supply curves, and then graph new curves after the substitute good and input prices decrease. How will the equilibrium price and quantity change after the substitute and input prices decrease? Explain your answer in English and using a graph.
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Homework Answers
A reduction in the price of the substitute will shift the demand curve to the left and it will decrease the price and quantity demanded in the market.
When the price of the input decrease it will shift the supply curve to the right. the new price will be lower and the quantity will increase. the graph is shown below. the price will decrease but the quantity at the equilibrium will be indeterminate and can be anywhere between Q and Q1. THe price will reduce to $P1. Quantity will be between Q (equilibrium E1) or E2.
Due to reduction in the price of the price of the goods will also fall and due to reducing in the price of the input the price will decrease but the quantity at equilibrium will be in determinate. a. S1 $P SP1 E2 D1 Q Q1 Quantity
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