Question

This is the market of instant noodles, an INFERIOR good that is produced with wheat flour. Instant mac and cheese is a substitute and green onions is a complement.

Price Q demanded Q supplied $1.80 320 200 $2.00 300 230 $2.20 270 270 230 300 $2.40 $2.60 200 330 $2.80 180 350

a) Using the information in the table below, draw a graphical illustration of this market, indicating the equilibrium quantity and equilibrium price;

For (b), (c), (d), and (e), show graphically or explain by words (if showing graphically make sure to label all the curves and the graphs and use arrows to specify the movements of the curves) what happens to supply or demand of noodles (shift to right or left?) and its equilibrium price and equilibrium quantity (increases or decreases?):

b) Price of instant mac and cheese decreases

c) Price of wheat flour increases

d) Consumer income increases

e) Price of green onions decreases

Answer 1

A. Market equilibrium is a situation where demand and supply curve intersect. At this point quantity demanded is equal to the quantity supplied.

Equilibrium price is $2.20 and equilibrium quantity is 270.

In the graph D and S are the demand and supply curve interacting at point E. P is the equilibrium price and Q is the equilibrium quantity.

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It is given that the commodity in question is an inferior good which is made up of wheat floor. Instant Mac and cheese is a substitute good and green onion are complementary goods.

B. If price of Instant Mac and cheese decrease.

Instant Mac and cheese are substitute goods. Substitute goods are those goods that can replace the demand for each other.

When price of substitute goods Decrease , keeping the price of inferior good to be constant, the demand for the inferior good will decrease. The demand curve will shift LEFTWARD from D to D1. equilibrium price will fall from P to P1. and equilibrium quantity will also fall from Q to Q1. Supply of the commodity is constant.

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Answer C. Price of wheat flour increases.

Since wheat flour is the raw material for instant noodles. Rise in price of wheat flour will increase the cost of production . As a result supply will Decrease. Assuming the demand to be coming constant. Supply curve will shift LEFTWARD from S to S1. Equilibrium price will rise from P to P1 and EQUILIBRIUM quantity will fall from Q to Q1.

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Answer d. Increase in income of Consumer , will Decrease the demand for inferior goods. Inferior goods show negative relations with the income. As income rises , demand for inferior goods will increase and when income falls the demand for inferior goods will rise.

As a result the demand curve for inferior goods will shift LEFTWARD from D to D1. Equilibrium price will fall from P to P1 and equilibrium quantity will fall from Q to Q1.

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Answer e. Price of green onions decreases

It is given that green onions are the complementary goods. Complementary goods are those goods that fulfill the demand for each other. When price of these goods rises the demand for its complementary falls, and when price of complementary goods falls, the demand for the commodity in Question will rise.

As a result the demand curve will shift rightward from D to D1. EQUILIBRIUM price will rise from P to P1 and EQUILIBRIUM quantity will also rise from Q to Q1.

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