Answer to Question #129366 in Microeconomics for arshiam Zafar

Question

Suppose ice cream demand is perfectly inelastic and supply is elastic. What will happen to the equilibrium price and quantity when price of milk increases? Explain with diagram.

Answer 1

A perfectly inelastic demand means that quantity demanded for ice cream does not change or has a minimal change in response to a change in price.

An elastic supply means that the ice cream is sensitive to price changes.

When the price of milk increases, the cost of producing ice cream will increase, which reduces the supply of ice cream. The supply curve for ice cream will shift from S1 to S2, resulting in a high equilibrium price P2, since the supply is elastic to price changes. But the quantity demanded will have a minimal change from Q1 to Q2 since the demand of ice cream is perfectly in elastic.

This has been depicted in the graph below: