ECON 262
Graphically and in words (arrows are OK) show what will happen to the market clearing price (P*) and market clearing quantity (Q*) and resource allocation (RA - are resources moving into the market or out of the market?) in each case below - and how resource allocation will change. Be sure to label your axes correctly and make it clear which way you are shifting your curves. Assume ceteris paribus.
1. Assume denim is used to make jackets. What will happen in the market for jackets if the price of denim increases? Are resources moved in or out of the jacket market?
P*
Q*
RA
2. Assume cherry pies and apples pies are substitutes. What will happen in the market for cherry pies if the price of apple pies decreases? Are resources moved in or out of the cherry pie market?
P*
Q*
RA
3. Assume the government levies a tax on the production of wine (how immoral!). What will happen in the wine market if the tax is levied? Are resources moved in or out of the wine market?
P*
Q*
RA
4. Assume wine and cheese are complements. Assume grapes are used to make wine. What will happen in the wine market if the price of cheese increases and the price of grapes increases? Are resources moved in or out of the wine market?
P*
Q*
RA
5. Assume wine and cheese are complements. Assume wine and grape juice are substitutes in production. What will happen in the wine market if the price of cheese decreases and the price of grape juice increases? Are resources moved in or out of the wine market?
P*
Q*
RA
6. Assume a new technology is introduced in the production of basketballs. Assume the NBA (National Basketball Association) gives a lot of politicians campaign money and therefore congress passes a law that stipulates that taxpayers must subsidize the production of basketballs. Assume basketballs are a normal good. What will happen in the basketball market if the new technology is introduced, the subsidy takes place, and the income of people who play basketball increases? Are resources moved in or out of the basketball market?
P*
Q*
RA
7. Assume a tax is placed on the service of providing rides to people in private cars (i.e., like Uber does) - hummm, I wonder who might be behind such a tax? What will happen in the taxi market after the tax is levied (taxis are not private cars providing rides)? Are resources moved in or out of the taxi market?
P*
Q*
RA
8. What questions do you still have about this material?