Question
1. Suppose the equilibrium price and quantity of bicycles is determined at $40 and 200 units, respectively. For some reason, the market price of the
1. Suppose the equilibrium price and quantity of bicycles is determined at $40 and 200 units, respectively. For some reason, the market price of the bicycles initially increases to $60 and then decreases to $20. How will these deviations from the equilibrium price be corrected in a perfectly competitive market? Explain with the help of suitable diagrams.
2. In each of the following situations, graphically show and explain what will happen to the equilibrium price and the equilibrium quantity for a particular product, which is an inferior good.
a. The population decreases and productivity increases
b. Income increases and the price of inputs increase
c. The number of firms in the market decreases and income decreases
d. Consumer preference decreases and the expected future price increases
e. The price of a substitute in consumption increases and the price of a substitute in production increases
3. Using graphs, explain how the equilibrium price and quantity of MP3 will change when: a. The demand curve for MP3 players shifts to the left and the supply curve for MP3 players shift to the right.
b. The demand curve for MP3 players shifts to the right and the supply curve for MP3 players shift to the left, but the supply curve shifts more than the demand curve.
c. The demand curve for MP3 players shifts to the right and the supply curve for MP3 players shift to the left, but the supply curve shifts less than the demand curve.
d. Both the demand curve and the supply curve for MP3 players shift to the left but the demand curve shifts more than the supply curve.
e. Both the demand curve and the supply curve for MP3 players shift to the right but the supply curve shifts more than the demand curve.
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