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In this question, you are analyzing the [competitive] market for ibuprofen (generic for Advil), an over-the-counter anti-inflammatory drug. Draw a graph that illustrates a hypothetical
In this question, you are analyzing the [competitive] market for ibuprofen (generic for Advil), an over-the-counter anti-inflammatory drug.
- Draw a graph that illustrates a hypothetical market for ibuprofen, labeling the axes, the supply curve (Sa), the demand curve (D0), and the equilibrium price (P0) and quantity (Q0). Assume that neither the demand nor the supply of ibuprofen is perfectly inelastic/elastic.
- Suppose that the price of acetaminophen (generic for Tylenol), a substitute for ibuprofen, drops suddenly. On the same graph, draw a new demand curve (labeled D1) which reflects how this would shift the demand curve for ibuprofen, and label the new short-run equilibrium price (P1) and quantity (Q1).
- Briefly explain your rationale for the direction of the shift in the demand curve for ibuprofen as drawn in b) above, and the impact this has on price and quantity.
- Now, suppose that after some time passes, producers are able to enter or leave the market in response to the change in demand described in part b). On the same graph, draw a new supply curve (labeled Sb) which reflects how this long-run response by producers would change the supply of ibuprofen, and label the new long-run equilibrium price (P2) and quantity (Q2).
- Briefly explain your rationale for the direction of the shift of the supply curve for ibuprofen as drawn in d) above, and the impact this has on price and quantity (going from Q1,P1 to Q2,P2).
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