Homework Question on Price and Markets
- Question 1: Graph both the demand and supply curves and label the equilibrium price and quantity. (2 marks)
- Question 2: Suppose the existing market price is $100. What will happen in the market? (1 mark)
- Question 3: Suppose that a famous celebrity starts wearing the backpack everywhere, making it very popular with young people. Young people are now willing to purchase 500 more backpacks per year at every price. Show this change on your graph and explain what happens to equilibrium price and quantity as a result. (2 marks)
- Question 4: What would need to happen in order to cause a movement along the demand curve for backpacks? How does this differ from what causes a shift in the demand curve? (2 marks)
- Question 5: Suppose that a rise in the price of the backpack from $140 to $160 causes the quantity demanded of Good X to fall from 850 to 650 units. Using the midpoint formula, calculate the demand elasticity of Good X (show the calculation) and identify its relationship to backpacks. (1 mark)
- Question 6: The Australian media publishes research showing that wearing backpacks can result in bad posture and future back problems. This news would be expected to cause the demand for backpacks to fall. What effects might be felt in other mark
Homework Answer on Price and Markets
Suppose the existing market price is $100, equilibrium price in the market will move from the original price and quantity equilibrium of $140 and 1600 units respectively. This will be because there will be an overall change in the amount demanded of the backpacks from 1600 to 2000 units.There supply curve will shift resulting from the reduction in the overall number of the backpacks. This will be due to a consequence of a decrease in their overall supply as an outcome of the producer’s unwillingness to take most of them to the market at the prevailing price, which is $100.
The act of the celebrity in question wearing the backpacks will result in an increase in fashion and tests towards the backpacks by the youths. As stated, it is true that this will have an overall growth in demand, approximated to additional 500 backpacks at each price levels by the respective consumers. This will lead to a shift in the demand curve, towards the right side, leading to an overall increase in their demand, as illustrated in the diagram, by use of the arrows.
In this case, we assume that the supply of the backpacks will remain constant due to none of the alterations taking place in its price. This will, therefore, lead to an establishment of new equilibrium at a higher point than the original one and on the right side of the initial equilibrium point, as shown in the above diagram. The equilibrium price will, therefore, increase with an accompanied increase in the equilibrium quantity. It is on the rise in this equilibrium price and quantity that the producers will start supplying more of the backpacks to this market, resulting in an increase in supply.