Suppose that a revolutionary young artist dies unexpectedly in a plane crash. Th

Question

Suppose that a revolutionary young artist dies unexpectedly in a plane crash. The pre-crash expected lifetime supply curve of his art is drawn in red on the graph below. However, since he died unexpectedly at a young age, the realized supply curve for his art becomes a vertical line at the total number of paintings that he produced (shown in orange). The demand curve for the artist's art is not known with certainty (especially given his high-profile demise) to people in our example. They only know that the lifetime supply is now fixed. Answer the following three questions that compare the outcomes from movement to a new equilibrium from a change in supply with the outcomes of an asset bubble for the artist's art. Note: This graph is only for reference Under which scenario(s) might we see a rapid price increase in a short period of time? Under which scenario(s) might we see people buying the art at the old price with the hope of selling it for more in the future? Under which scenario(s) do we expect to see a dramatic price drop following the dramatic price rise? Only adjustment to new equilibrium Only asset bubble r Both of the above Only adjustment to new equilibrium Only asset bubble 0 Both of the above Only adjustment to new equilibrium Only asset bubble 0 Both of the above

Explanation / Answer

1. both of the above

2. both of the above

3. only asset bubble

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