Question

6. Suppose that people expect that the price of computers will rise next month. At the same time governments impose a $3.00 tax on the computer industry.   What happens to equilibrium price and quantity?   Illustrate using a graph.   

7. Suppose that the government impose a subsidy of $1 on the production of Nikes (Jordans). At the same time Nikes and Reeboks are substitutes and the price of Reeboks decrease. What happens to equilibrium price and quantity? Illustrate using a graph.   

8. Assume that producers expect the price of shampoo to be higher in April. At the same time a new study just released states that washing your hair everyday increases the probability of baldness. What happens to equilibrium price and quantity?  Illustrate using a graph.   

9. Assume   that VCRs and videotapes are complements.    When the price of VCRs fall, and the price of plastic (used to make videotapes) falls, what should happen to price and quantity of videotapes. What happens to equilibrium price and quantity? Illustrate using a graph.    

Note: In each question make sure you discuss which determinant is involved and what is happening to P and Q. In addition, in questions 1-5 only make sure
you specify which Q it is (Qs or Qd) and how do you know.

Questions 6-9 only: Multiple shifts (demand and supply changes at the same time); four (4) equilibriums shift the curves by the same magnitude (amount), P or Q will be no change.

Answer 1

6. If people expect price to computers to rise next month, they would demand more now so that they can hoard for later. So demand curve will shift to the right. Tax will be on new demand curve and old supply curve. (Fig and changes in the picture).

7. If the price of Reebok fall, which is the substitute of Nike, the demand for Nike will fall as people will now shift to consuming Reebok. Demand curve of Nike will shift to the left. Subsidy will be given on new demand curve and old supply curve. P1 is the price paid by consumers and Po is the price received by sellers. The difference is the subsidy. (See figure in the pic).

8. If producers expect the price to increase, they will supply more and supply curve will shift to the right. If consumption of the good, is seemed harmful by the consumers, the demand will fall and shift to the left. (See fig for changes).

9. Since price of VCR fall, consumer will demand Videotapes more since they are complements and they're consumed together. Demand will shift to the right. If price of plastic fall, which is a raw material in production of Videotapes, more of them could be produced. Supply shifts to right. (See fig for changes.)

Let me know if anything is unclear :)