Answer to Question #199073 in Microeconomics for Naima. Ahmed

Question

Assignment 2

Marks 10

Due Date: 29th May,2021

Q. What will happen to the equilibrium price and quantity of French fries in each of the following cases? You should state whether demand or supply (or both) have shifted and in which direction. (In each case assume ceteris paribus.) (a) A rise in the price of oil ; (b) A rise in the demand for burgers; (c) A rise in the price of potatoes; (d) An expected rise in the price of potatoes in the near future; (e) A tax on fries’ production; (f) The invention of a new, but expensive, process for removing all cholesterol from fries plus the passing of a law which states that all fries producers (like fast food chains) must use this process.

Answer 1

(a) a rise in the price of oil means that the cost of producing French fries is increased and thus less quantity will be produced and supplied to the market. there will be a shift in supply curve to the right , equilibrium price will increase while the equilibrium quantity will decrease.

(b) a rise in demand for burgers will result in an increase in the demand for French fries because the two goods are complementary. the demand curve will shift to the right , equilibrium quantity and price will both increase.

(c) a rise in the price of potatoes implies an increase in the price of the resource required for production and thus will lead to a decrease in supply of French fries. supply curve will shift to the right, equilibrium price will increase while equilibrium quantity will decrease.

(d) an expected rise in the price of potatoes in the near future implies that suppliers will then have to offer more quantity to the market so that they may compensate for the less supplies that they will make when price of potatoes rises in future. the supply curve will shift to the left. the equilibrium quantity will increase while the equilibrium price will reduce.

(e) tax on fries' production means an increase in the cost of production and this will result in a decrease in the quantity produced and supplied to the market, the supply curve will shift to the right, equilibrium price will increase while the equilibrium quantity will reduce.

(f) the rate of production of fries will be reduced because of an increase in the cost of production and hence less quantity will be supplied to the market. supply curve will shift to the right, equilibrium price will increase while equilibrium quantity will decrease.