Question

Use the methodology of comparative statics with appropriately labeled supply/demand graphs to show how each of the following events would affect the equilibrium price and quantity in the market for bottled water. Label the initial equilibrium price and quantity and the new equilibrium price and quantity (if possible) on your graphs. Draw one graph for part a, one for part b, one for part c and one for part d. If you shift a curve in any of your graphs, briefly explain the reason why.  

a. There is an increase in household income.

b. There is technological improvement in the bottled water production process.

c. There is a decrease in the price of fruit juice.

d. The following two events occur simultaneously.
     1. Consumers expect a higher future price for bottled water.
     2. There is an increase in the price of plastic.

Answer 1

a)

Increase in consumer income is a demand determinant. This will cause the demand curve to shift to the right ( increase), The new demand curve is D1. The equilibrium price will increase to p1 from p0 and quantity will increase from qo to q1.

b)

The breakthrough in technology will decrease the cost of production. The fall in the cost of production will cause the supply curve to shift to the right. The equilibrium price will fall from po to p1 and quantity will incrase from qo to q1.

c)

Fruit juices and botted water are substitute products. If the price of fruit juices fall, then demand for bottled water will fall. The demand curve will shift to the left ( decrease). The equilibrium price and quantity will fall.

d)

Higher expectations of future price will increase demand. The demand curve will shift to the right.

Higher price of plastic, an ingredient for making bottles , will cause the cost of production to increase. The supply curve will shift to the left. The equilibrium price will rise and quantity will fall.

Market (@) for bottled water S Price R & Po T T DI V Quantity (6) s Prie Pl gogy Quantity si d) IT TS c Pi Prie Po Price Pot & Pi D D algo Quantity ai 10 Quantity

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