Question

For each of the following cases, explain whether supply and demand will increase, de- crease, or not change and the resulting effect on equilibrium quantity and equiliibrium price (increase, decrease, or not change). (2 points each) (a) What is the effect of an increase in income on the market for "healthy" food? Assume health food is a normal good. (b) What is the effect of legalizing cannabis (marijuana) use on the market for alcohol? Assume cannabis and alcohol are substitutes. c) What is the effect of hospital closures in a city on hospital visits in the city? (d) What is the effect of the introduction of a relatively cheaper generic drug on the market for a brand-name prescription drug? Assume these two drugs are substitutes. For example, consider the introduction of generic amphetamine salts as an alternative to "Adderall”.

Answer 1

Answer a. Health food is a normal good it means demand for health food is positively related to the income. When income increases, the demand for health food increases. Demand for health food shifts right. Equilibrium Price rises, equilibrium Quantity rises.

b. Cannabis and alcohol are substitute goods. It means legalizing cannabis will shift the demand for alcohol to cannabis. In the market for alcohol, Demand will decrease.

Demand curve shifts leftward. Equilibrium Price falls and equilibrium Quantity falls.

c. Hospital closures in the city means the supply hospital services will fall. Hospital visits will fall. Supply curve shifts leftward. Equilibrium Price rises and equilibrium Quantity falls.

d. Introduction of relatively cheaper generic drug on market leads to rise in demand for generic drugs and fall in the Demand for brand name prescription drugs.

Demand curve shifts leftward.

Equilibrium Price falls and equilibrium Quantity falls.