Answer to Question #147558 in Microeconomics for ammar

Question

⦁ Plot the demand and supply curves and show the equilibrium price and quantity. Also, briefly explain if law of demand and supply holds true in this case. (2 Marks)
⦁ Is there surplus or shortage in the market at price Rs.40? At price Rs.120? (2 Marks)
⦁ Suppose if the price of frozen yogurt decreases, elucidate the change it might cause on the ice-cream market given the consumption behavior and also illustrates the same through using 2-dimensional space. In your opinion what type of elasticity best describes this situation? (3 marks)
⦁ Suppose the price of milk decreases from the equilibrium price. Explain what will happen to the supply curve and also indicate the same on the graph. (1mark)

Answer 1

⦁ The demand curve is downward-sloping and supply curve is upward-sloping, they intersect in the equilibrium point, at which equilibrium price and quantity can be found. Law of demand states, that if the price increases, then the quantity demanded decreases. Law of supply states, that if the price increases, then the quantity supplied increases too, so both laws hold true.

⦁ We need to know the equilibrium price to answer if there is a surplus or shortage in the market at price Rs.40 and at price Rs.120.

⦁ If the price of frozen yogurt decreases, then the demand for ice-cream will decrease, because these goods are complements. The cross-price elasticity best describes this situation.

⦁ If the price of milk decreases from the equilibrium price, then the supply will increase, and the supply curve will shift rightwards.