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QUESTION ONE Consider the market for apple juice. In this market, the supply curve is given by @s = 10P, -5P, and the demand curve
QUESTION ONE Consider the market for apple juice. In this market, the supply curve is given by @s = 10P, -5P, and the demand curve is given by Q, =100-15P, +10P,, where J denotes apple juice, A denotes apples, and T denotes tea. a) Assume that PA is fixed at $1 and Pr = 5. Calculate the equilibrium price and quantity in the apple juice market. b) Suppose that a poor harvest season raises the price of apples to PA = 2. Find the new equilibrium price and quantity of apple juice. Draw a graph to illustrate your answer. c) Suppose PA = 1 but the price of tea drops to Pr = 3. Find the new equilibrium price and quantity of apple juice. d) Suppose PA =1, PT = 5, and there is a price ceiling on apple juice of PJ = 5. What is the excess demand for apple juice as a result? Draw a graph to illustrate your answer. QUESTION TWO The late Nobel laureate economist George Stigler wrote that the "purely 'economic' case against monopoly is that it reduces aggregate economic welfare... when the monopolist raises prices above the competitive level in order to reap his monopoly profits, customers buy less of the product, less is produced, and society as whole is worse off." (i) Draw a graph to summarize what Stigler said. Specifically, indicate in the graph the price that is what Stigler refers to as "the competitive level." Compare this price to the price at which the firm earns "monopoly profits. (ii) Use your graph to explain why society is worse off when a monopolist charges a price that earns monopoly profits rather than when price is set at the "competitive level"
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