Answer to Question #204621 in Microeconomics for Dikshya

Question

• Draw a situation market equilibrium for Rio Juice.  What happens to it in each of the following scenarios to the quantity and price of Rio Juice?   Why?
• The price of Real Juice (a substitute) increases
• Government increases the minimum wages of labour workers
• The taste of majority of consumers shifts away from juice to aerated drinks (coke, pepsi) and this leads to the decrease in no. of producers of Rio juice.
• Government provides subsidies to Local juice producers while, also the income of consumers who treat juice as normal good increase

Answer 1

Market equilibrium is where the demand and supply are equal in the market and the result is that the prices stabilizes.

• When the prices of Real juice increases which is a substitute to Rio juice, the result will be an increase in demand for Rio Juice. The substitute will be less affordable than Rio juice hence the increase in demand for Rio juice.
• When the minimum wage increases, this represents an increase in income and the effect will be increased demand for Rio Juice. The increased demand will cause the price for Rio juice to gradually increase in the short run.
• When there is change in taste and preferences of Rio juice, customers shift away and the result is reduced demand for Rio juice. The prices will reduce.
• When the government provides subsidies, the production will increase thus supply of juice will also increase. Increase in supply reduces the prices. When the income of consumers increase, the demand will also increase and this will cause the prices to increase. In general, the equilibrium will remain constant.