Question
The crisis triggered by the coronavirus has increased the demand for some products. Two examples are toilet paper for domestic use (since people are spending
The crisis triggered by the coronavirus has increased the demand for some products. Two examples are toilet paper for domestic use (since people are spending more time at home), and medical grade masks.
A) What would have to happen to the prices of these goods to ensure that their markets remain in equilibrium?
B) When will the change in prices be larger - if the supply of toilet paper is elastic, or inelastic?
C) Suppose that grocery stores and toilet paper manufacturers, concerned about the bad look of raising prices amidst a pandemic, keep prices constant in the face of increased demand. What do you think will happen in the market? Will there be a surplus or shortage (or equilibrium)?
D) Suppose that, in two months, there are no shortages of medical masks and the price is only slightly higher than it was 3 months ago. What does that tell you about the price elasticity of supply?
The competitive market model is built upon assumptions. Under those assumptions, interaction in the market leads to certain outcomes: the law of one price, market clearing, and Pareto efficiency. Explain how each of the following "relaxations" of the assumptions of the model would affect the three outcomes:
a. Goods are not homogenous
b. There are few sellers
c. Sellers collude
d. Price information is not easily available
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