Question

Consider the market for soft drinks. Assume that the market is perfectly competitive. Use the model of supply and demand to determine the effects on equilibrium price and quantity of soft drinks for the following events. part a: Workers at soft drink bottling plants go on strike demanding higher wages part b: Household income increases and soft drinks are a normal good part c: The price of fruit juice, a substitute for soft drinks, decreases a. price decreases, quantity decreases b. price increases; quantity increases c. price increases, quantity decreases d. price decreases, quantity increases (Ctrl) I

Answer 1

a) Workers at soft drink plants go on strike demanding higher wages which will raise cost of production for soft drink manufacturer. Leftward shift in supply curve of soft drink raise price level from P to P1 and reduce quantity traded from Y to Y1.

b) As softdrink is normal good, increase in income of consumer will shift aggregate demand of soft drink to its right from AD to AD1 which will raise price level from P to P1 and raise output level from Y to Y1.

Pring AS po AD لا لا quentity

c) Price of fruit juice which is a substitute of soft drink decreases, consumers will buy more of substitute good and demand less of softdrink which will reduce demand of soft drink. It will shift demand curve to its left which reduce price level from P to P1 and reduce output level from Y to Y1.