Question

Problem Set 1 - Micro Online - Dunbar, p. 3. (8 points total) Consider how each of the events below would (separately) affect the market for Samsung smartphones. For each event, (1) indicate which curve (Supply or Demand) will shift & in which direction (left or right). (2) explain, in one sentence, the reasoning behind your prediction (3) show the curve shift graphically, and (4) indicate the impact of this change on the equilibrium price & the equilibrium quantity. a) Event 1: The price of owning an Apple iPhone increases. (Note: Assume that Samsung phones and Apple iPhones are substitute goods). (1) Which Samsung phone market curve shifts? Which direction? (2) Explanation of your reasoning. (3) On your own piece of paper, graph the effect of this change on the market for Samsung phones (no need to draw this electronically). Price per Market for Samsung Phones Samsung phone Supply P. Demand #of Samsung (4) As a result of this change, the equilibrium price will increase/decrease) ase/decrease) the new equilibrium quantity will increase/decrease) and b) Event 2: The government adds an additional tax of $50 on Samsung for each phone they produce. (1) Which Samsung phone market curve shifts? _Which direction? (2) Explanation of your reasoning. (3) On your own piece of paper, graph the effect of this change on the market for Samsung phones (no need to draw this electronically). Price per Market for Samsung Phones Samsung phone Supply Demand #of Samsung (4) As a result of this change, the equilibrium price will increase/decrease) and the new equilibrium quantity will increase/decrease) (NEXT PAGE)

Answer 1

Answer:

a. Event 1: (1) Demand curve shits to the right.

(2) Reason: When the price of Apple iPhone increases, consumers will prefer to buy its substitute, Samsung phone. So the demand for Samsung phone will increase, shifting the demand curve to the right.

(3)

Market for Samsung Phones Price per Samstone OND supply Demand TOT ng

(4) As a result of this change, equilibrium price will increase, and the new equilibrium quantity will   increase.

b. Event 2: (1) Supply curve will move to the left.

(2) Reason: When the demand is the same, the taxes will discourage the producers. It is same as reduction of incentives for them to produce goods. So they will divert their resources to a more profitable production. So the supply decreases.

(3)

  

Price per arket for Samsung Phones Samsung phone OS Demand Samsung

P_D is the new price after tax. As there is an increase in the price (consumers have to buy at this new price), the equilibrium price decreases. (Equilibrium price is the price at which the producers new supply matches the consumer demand at a stable price)

(4) As a result of this change, equilibrium price will decrease, and the new equilibrium quantity will decrease.