Question

Consider the market for leather. The following events occur simultaneously:

1. The price of beef rises(beef and leather both come for cows)

2. The price of alligator hides increases.

3. Consider the market for leather. The following events occur simultaneously: (i) (ii) The price of beef rises (beef and leather both come from cows). The price of alligator hides increases. Draw a demand-and-supply graph showing equilibrium in the market for leather before the two events described above. Label the axes and curves. Label the initial equilibrium before events (i) and (ii)- as P, and Q on your graph. Now show on your graph how event (i) affects the demand or supply curves for leather. Briefly explain which of the demand or supply variables caused the effect you are showing on your graph. c. Now show on your graph how event (ii) affects the demand or supply curves for leather. Briefly explain which of the demand or supply variables caused the effect you are showing on your graph. d. Based on your graphic analysis, what do you predict will happen to the equilibrium price of leather? The equilibrium quantity of leather? Very briefly expain

Answer 1

b) Beef and leather are complementary goods in production. If the price of beef goes up, the demand for leather will decrease. The demand curve for leather will shift to the left which will lower the equilibrium price and quantity. The new equilibrium price will be p₁ and equilibrium quantity will be q₁.

c) Alligator hides are substitutes for leather. If the price of a substitute good, in this case, alligator hides goes up then demand for leather will increase. This will result in higher equilibrium price p₁ and quantity q₁.

9o TD c> Po