Explain each of the following statements using supply-and-demand diagrams.
a) “When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the
country.” (2.5 Marks)
b) “When the weather turns warm in New England every summer, the price of hotel rooms in
Caribbean resorts plummets.” (2.5 Marks)
c) “A strike by steelworkers raises steel prices.” (2.5 Marks)
d) “The price of station wagons rises.” (2.5 Marks)
QUESTION EIGHT
a) What are the main features of the perfectly competitive market? (6 marks)
b) With the help of well-labeled diagrams, compare the long run equilibrium of a firm under a
perfectly competitive market structure and a monopoly market structure. (14 marks
Solution:
a.). When a cold snap hits Florida, the supply of orange juice diminishes, as a result the price of orange juice increases in supermarkets throughout the country due to low supplies. As a result, the quantity demanded will tend to decrease due to the high prices.
This is depicted by the below graph:
b.). The warm weather in New England will tend to attract more tourists to the Caribbean resorts resulting in huge demand for hotel rooms. As a result, the price of hotel rooms in the Caribbean resorts will increase.
This is depicted by the below graph:
c.). A strike by steel workers will reduce the production of steel. As a result, there will be a reduction of steel supply in the market which will increase its price. Ultimately, the quantity demanded will decrease as prices go higher.
This is depicted by the below graph:
d.). When the price of station wagons rises, their demand will decrease and as a result their prices will go down in the long run.
This is depicted by the below graph.
Question 8:
a.). The main features of a perfectly competitive market are as follows:
· Large Number of Buyers and Sellers.
· Homogeneity of the Product.
· Free Entry and Exit of Firms.
· Perfect Knowledge of the Market.
· Perfect Mobility of the Factors of Production and Goods.
· Absence of Price Control.
b.). The comparison is depicted by the below two diagrams:
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