Question

What happens to the market demand for McDonald’s hamburgers when ­­­______?

Burger King increases the price of its hamburgers, while the price of McDonald’s hamburgers is unchanged.

The question is presenting a change in the demand environment for McDonald’s hamburgers. The assumption of "ceteris paribus" (other things being equal) is made in each case.

You should begin by drawing a typical market demand curve for McDonald’s hamburgers. You must both explain your answer verbally and illustrate your answer graphically. Label the axes of your graph and label or otherwise identify the curve(s) in your graph. If you use abbreviations, state what the abbreviations mean.

Your answer should include the following statements:

(a) the demand curve to which the result pertains (it is: “the demand curve for McDonald’s hamburgers”).

(b) whether the result involves “a movement along” the demand curve or “a shift in” the demand curve.

(c) specification of the direction of the “movement along” or “shift.”

(d) why the “moving along” or “shift” occurs.

Answer 1

When the price of burger King's hamburger increases, people increases the demand for McDonald's hamburger because burger king and McDonald are substitutes for consumers. Because there is a change in price of related good, demand curve shifts to the right. Because of the excess demand created, New equilibrium is reached at e' where equilibrium quantity of McDonald'' hamburger increases to Q' and equilibrium price increases to P'.