Question

Question Six (worth ten points) Refer to Graph Two in answering the parts of this question. Assume that initially we are at equilibrium at point M and that the cost to each firm of producing a unit of the good goes down by $15 per unit. This shifts the supply curve to the right. (a) How much did supply go up (measured in units of the good)? There is an excess supply at the price of $50. This excess demand, if prices are allowed to fall, will decrease the price to $39. (g) How much did the quantity demanded go up by? (h) Why does it make sense that the quantity demanded went up when the price fell? (i) If the value someone attached to the 300th unit was equal to $80 before the supply curve shifted, what, if anything, happened to the value of the 300th unit after the supply curve shifted? 6) In the following statement, everything stated is correct except for the claim that we need to shift the demand curve to the right. Why don't we need to shift the demand curve to the right? "When supply goes up this results in a decrease in price which causes the price to go below the value that some people attach to the good. This results in more people wanting to buy the good. To show this graphically we need to shift the demand curve to the right."

Answer 1

a) supply increased by 1100-500=600 units

g) quantity demanded increased by 800-500=300 units

h) when the price fell more income is left to the consumer and due to this demand increased.

i) if the value attached to 300th unit was $80 then after the supply curve shifted, the demand curve will also shift as the price paid by the consumer is still less and if the value falls then the demand will also fall accordingly.

j) There is no need of shifting the demand curve as after supply curve shifts the economy is in equilibrium and if the demand curve shifts it will increase the price level again making the consumers worse off.