Question

1. Suppose the U.S economy enters a recession and incomes fall. What will happen to the equilibrium prices and quantities of inferior goods? If price stays the same would that be equilibrium? Why or why not? What will eventually happen in th3 market?   What happened to equilibrium price and quantity? Which quantity is affected and how do you know? Would your answer be the same if you were discussing normal goods? Explain using supply/demand graphs.

2. Draw a graph showing the impact of students returning to campus in June on the market for textbooks in a college town. If price stays the same would that be equilibrium? Why or why not? What will eventually happen in the market? What happens to equilibrium price and quantity? Which quantity is affected and how do you know? Explain using a graph how this will impact the market for textbooks.

3. A new medical study reports that drinking alcohol twice a week will increase your chance of getting liver cancer. If price stays the same would that be equilibrium? Why or why not? What will eventually happen in the market? What happens to equilibrium price and quantity? Which quantity is affected and how do you know?   Illustrate using S/D graph the effects of this report on the market for alcohol.

4. Suppose that a technological advance takes place in the automotive industry.   If price stays the same would that be equilibrium? Why or why not? What will eventually happen in the market? What happens to equilibrium price and quantity? Which quantity is affected and how do you know? Explain using a graph how this will impact the market for automobiles.

5. Wheat is used to produce bread. If the price of wheat increases what is likely to happen to the equilibrium price and quantity for bread. If price stays the same would that be equilibrium? Why or why not? What will eventually happen in the market?   What happens to equilibrium price and quantity? Which quantity is affected and how do
you know? Illustrate using a graph.   

Questions 1-5 only: If price remains the same after demand or supply changes would that be equilibrium? Why or why not?

Answer 1

1. An inferior good is one whose demand decreases when income rises and vice versa. When there is a recession and fall in incomes, consumers will prefer more of inferior goods. Hence, the demand for inferior goods will rise, shifting the demand curve to the right. Higher demand will cause the supply of inferior good to rise too, hence shifting the supply curve to the right as well. The shifts in the demand and supply curve gives a new equilibrium with a higher price and higher quantities of the inferior goods.

Price INFERIOR GOOD is 18 = - - - X XE - المحمدي with an increase in demand for inferior good D to D' and increase in supply from s to S, equilibrium changes from E to E' with higher and quantity, pi and Q, respectively. from the perice

If the price remains the same at P, then it would not be an equilibrium condition. The situation will create an excess demand for the inferior good, which will be equal to Q^'-Q

The case of normal goods is entirely opposite of inferior goods. With fall in income, the demand for normal goods would decrease, thereby decreasing the equilibrium price and quantity of the normal good.