Question

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 the price of beef, an important ingredient for making cheeseburgers, has increased 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. 

The first group of students thinks the increase in the price of cheeseburgers is due to the fact that the price of beef, an important ingredient for making cheeseburgers, has increased.

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.

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.

Suppose that both of the events you have just analyzed 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?

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

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

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

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

Answer 1

Answer 2

Increase in the price of ingredient decreases supply of pizza and shifts supply curve leftwards.

Increase in the price of calzones shifts demand in favor of pizza as pizza and calzones are substitute goods. Thus demand of pizza increases which shifts demand curve rightwards.

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

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

Answer 3

Price on • - - SS U P1 Q2Q1 Quantity

Answer 4

Answer 5

In first case when the price of dough is increasing, te supply would reduce. This is because the cost of inputs has risen, which would increase the cost of production and reduce the profits. So supply curve would shift to left.

This would increase the price of good from P1 to P2 and reduce the equilibrium quantity from Q1 to Q2.

Price on • - - SS U P1 Q2Q1 Quantity

Now the second explanation is that due to increase in number of students, the price has increased.

This would be because the demand curve would shift to right, which would increase the equilibrium price and equilibrium quantity of the good.

This is shown in the figure below

Price DDDD' SS Q1Q2 Quantity

Had the equilibrium quantity reduced because of the above changes, the supply factor would have been more dominant. This is because the quantity reduced is experienced in that case.

So answer would be option B)

Answer 6

The price of cheeseburgers in a college decrease, the students of economics class are debating the cause of the price decrease. Group 1: suggest that the price decreased because several new burger joints have recently opened in the area. More joints result in more supply of burgers in the market. Supply S Price Demand Quantity Figure 1 As shown in figure 1. the supply curve will shift rightward from supply to Si. This will lead to fall in equilibrium price of cheeseburgers and increase the equilibrium quantity. Group 2: suggest that the price decreased because a recent decrease in college enrollment. Decreased in student's enrollment leads to fall in the demand for cheeseburgers.

Supply Price Demand Quantity Figure 2 As shown in figure 2, the demand curve will shift leftward from demand to Di. This will lead to fall in equilibrium price of cheeseburgers and decrease the equilibrium quantity To figure out which of the possible cause is dominant cause of the decrease in the price of cheeseburgers draw the figure for each scenario. As per the given scenario 1, if the supply shift in the market is larger than the shift in demand, the fall in price will be greater as shown in figure 3.

Supply PRICE Dollars per cheeseburger) Demand QUANTITY (Cheeseburgers) Figure 3 Hence, the given statement is incorrect. As per the given scenario 2, if the supply shift in the market is larger than the shift in demand, the equilibrium quantity of cheeseburgers increases as shown in figure 3. Hence, the given statement is incorrect. As per the given scenario 3, if the demand shift in the market is larger than demand supply, the equilibrium quantity of cheeseburgers decreases as shown in figure 4.

Supply / S PRICE Dollars per cheeseburger) mand QUANTITY (Cheeseburgers) Figure 4 Hence, the given statement is correct. As per the given scenario 4, whichever change occurred first won't be the primary cause of the change in the price of cheeseburgers. The primary cause of the change in the price of cheeseburgers depend on the magnitude of shift in curves. Hence, the given statement is incorrect. Therefore, here the third statement i.e. option C is the dominant cause of the decrease in the price of cheeseburgers.