Suppose Jeff’s demand curve for coffee is Q=5 - P, for P 5 . Suppose that the su
ID: 1134780 • Letter: S
Question
Suppose Jeff’s demand curve for coffee is Q=5 - P, for P 5 . Suppose that the supply curve for coffee at Sarbucks is Q= 4P -5, for P $1.25
Price
QD
QS
Surplus/(Shortage)
Effect on price
$1.00
4
0
Shortage
increase
1.50
3.5
1
Shortage
Increase
2.00
3
3
equilibrium
No Change
2.50
2.50
5
Surplus
Decrease
3.00
2
7
Surplus
decrease
3.50
1.50
9
Surplus
Decrease
4.00
1
11
Surplus
decrease
Jeff also likes Red Bull and it is a substitute for coffee for him. On separate axes draw supply and demand curves for the Red Bull and coffee markets. Suppose a government regulation increases the cost of producing Red Bull. How does that change the equilibrium price and quantity in the Red Bull market? What does it do to the coffee market?
Martin, like Jeff, enjoys coffee, but he takes his coffee with milk. On separate axes draw supply and demand curves for the coffee and milk markets. Suppose that a disease kills off half of the milk producing cows. How does that affect the milk market? What happens to the equilibrium price and quantity? What does it do to the coffee market?
Think about a market you are familiar with. Draw supply and demand curves and identify the equilibrium. Now draw and explain three possible ways this market could be “shocked” and how such would impact your market. One of your “shocks” must be supply side and one must be demand side.
Price
QD
QS
Surplus/(Shortage)
Effect on price
$1.00
4
0
Shortage
increase
1.50
3.5
1
Shortage
Increase
2.00
3
3
equilibrium
No Change
2.50
2.50
5
Surplus
Decrease
3.00
2
7
Surplus
decrease
3.50
1.50
9
Surplus
Decrease
4.00
1
11
Surplus
decrease
Explanation / Answer
1) When Red Bull and Coffee are substituted implies that if the price of coffee increases then people would substitute it with Red bull and demand for Red Bull will increase. Suppose government regulates by increasing the cost of producing Red bull then supply of red bull shift to the left and price of red bull will increase and quantity of red bull supplied or demanded would fall this implies that demand for coffee will be more as both red bull and coffee are substitutes and this will be shown by a rightward shift in the demand curve of coffee.
2) Martin like coffee with milk means for him both goods are complements implies if the price of milk increases the demand for coffee will decrease. Suppose that a disease kills off half of the milk-producing cows implies supply will decrease represented by a left shift in the supply curve for milk then price of milk will rise and result into a decrease in demand for coffee as now the demand curve of coffee will shift leftwards.
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