Question

After the end of the most recent drought, California homeowners began to consider alternatives to maintaining and watering grass lawns in front of their homes. One of the alternatives for grass lawns is artificial turf. Draw a diagram representing the market for artificial turf after the end of the most recent drought. Identify the equilibrium price (P1) and quantity (Q1). The market was in equilibrium until the two events described below occurred simultaneously.

Part 1: A breakthrough technology was just discovered that allows artificial turf to be manufactured using inexpensive material. Illustrate how the technological breakthrough will affect the artificial turf market. Label the curve you shift related to this new fact as either D2 and/or S2. Identify the new equilibrium and label it E2. Identify and label the new equilibrium price (P2) and quantity (Q2).

Part 2: After the end of the drought for the next two years, the state experienced above average rainfall. As a result, the price of watering grass lawns decreased significantly. Illustrate what happens in the artificial turf market because of the decrease in the price of watering lawns. Label the curve you shift related to this new fact as either D3 and/or S3. Identify the new equilibrium and label it E3. Identify and label the new equilibrium price (P3) and quantity (Q3).

Part 3: After these two simultaneous events occur, (a) identify the new equilibrium price (P2) and quantity (Q2) in the artificial turf market. (b) Label the new equilibrium point E2. (c) Is it possible to determine with certainty the directional movement of the price or quantity in the artificial turf market based on the information provided? If so, in which direction does the price or quantity move?

Part 4: Assume that there is no change in the equilibrium quantity after these two events occur. Considering the simultaneous events that occurred in the market, how would you explain the stability of the quantity in the market?

Answer 1