Answer to Question #178430 in Microeconomics for hasnat

Question

Biryani and borhani are complements. Both have inclastic demand, A strike in dairy farming industry causes a decline in the production of yogurts. Use appropriately labeled diagrams to answer the following questions. (All diagrams must be explained properly)

a. How will this affect the price of yogurt?

b. What will happen to the price of a bottle of borhani? How will the expenditure on borhani change?

c. What happens to the price of biriyani? What happens to total expenditure on biriyani?

Rice is a basic necessity good in Bangladesh. Using diagram explain if the government places a Tk.60 tax on consumers of rice, will the price paid by consumers rise by more than Tk.60. less than Tk.60, or exactly Tk.60?

Answer 1

(a)The price of yogurt will increase.

As shown above, when supply of a good reduces from "S1" to "S2" it's price will rise from price "P1" to price "P2".

(b) For complementary goods with inelastic demand, total expenditure of a good increases when it's price increases.

The price of borhani will rise and it's total expenditure will rise.

(c) The price of biryani will remain constant and it's total expenditure will also remain constant because it's not affected by change in price of borhani.

(d) The price paid by consumers will rise by exactly Tk. 60.

As shown in the graph the shaded part is the tax imposed on consumers. "Po" is the initial price the consumers paid without tax . When tax is imposed on consumers, they will pay price "Pc" which is equal to initial price "Po"plus the tax .