Question

Answer both questions in full sentences for full credit. Assume you are starting at equilibrium.

1. Adam owns an Italian restaurant and is looking to produce much more food. He implements a new technology that results in him letting go of two of his employees. What will happen to his supply and demand model? Which curve shifts and why? What happens to equilibrium price and quantity for Adam's Italian Food?

2. Peanut butter and almond butter are substitutes. When the price of almond butter rises, what happens to the market for peanut butter?

Answer 1

i. Increase in the level of technologival growth will shift the supply curve of the firm producing Italian food rightwards to S'S' and thus new equilibrium occurs at point E2. At this new equilibrium level, equilibrium price has decreased and equilibrium quantity has increased in the market for Italian food.

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ii.Since both are substitutes, an increase in the price of one good increase the demand for another good leading to increase in equilibrium price and equilibrium quantity of peanut butter.