Comparative Statics 3. Refer to the graph below, which represents a theoretical

Question

Comparative Statics

3. Refer to the graph below, which represents a theoretical D/S model with a market in equilibrium at price P* and quantity Q*.

A. Assume that this product is endorsed by a popular sports figure and as a result becomes more popular. In the immediate future (short run), which way will the demand curve shift (left or right)? Will the new equilibrium price be (higher or lower)? Will the new equilibrium quantity be (higher or lower)?

B. Consider again the situation in part a. If this is a competitive market, what will happen to equilibrium quantity in the LONG run? To equilibrium price in the LONG run?

C. Begin again with the initial equilibrium. Assume now that a natural disaster destroys a factory where this product is produced. Will the immediate impact be on the demand curve or on the supply curve? Which way will the curve shift (left or right)? Will the new equilibrium price be (higher or lower)? Will the new equilibrium quantity be (higher or lower)?

D. Consider again the situation in part c in which a natural disaster occurs. If this is a competitive market, what will happen to equilibrium quantity in the LONG run? To equilibrium price in the LONG run?

Explanation / Answer

a) The demand curve wil shift to the right.The equilibrium price and quantity will rise.

b) In the long run, the supply surve will also shift out. The equilibrium price will go back to initial equilibrium price. But the total quantity in equilibrium in the long run will be even higher.

c) The supply curve will shift ot he left. The equlibrium price will be higher but the equlibrium quantity will be lower.

d) In the long run, the supply curve will shift back to original position. Hence, both price and quantity will come back to initiial equilibrium.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.