Question

please examine the model and illustrate how the chart changes (supply and demand shift) with the hurricane and the news of eating the apple causing cancer. Please also answer the bottom two questions regarding the new equilibrium price and quantity.

B1. Examine the model below. This concerns the apple market. Suppose the market equilibrium price is established at Mp. Illustrate, and then explain (below by circling the correct response) the likely results (supply and demand) of a hurricane in that market area, combined with the news that eating an apple a day is now found to be a sure way to cause cancer. Apples The new equilibrium price is (circle the correct answer): Higher than the original price; Lower than the original price; Indeterminate The new equilibrium quantity is (circle the correct answer): Higher than the original quantity; Lower than the original quantity; Indeterminate

Answer 1

It is given that there is a hurricane in the market area which will reduce the supply of apples in the market. There is a simultaneous fall in the demand for apples because of the news that eating apples cause cancer. Since both the demand and supply of apples fall, the new equilibrium quantity will be lower than the original quantity.

The new equilibrium price will be more than the original price if the fall in supply is more than the fall in demand which will create excess demand in the market. However, the new equilibrium price will be less than the original price if the fall in supply is less than the fall in demand which will create excess supply in the market. The new equilibrium price will be equal to the original price if the fall in supply is equal than the fall in demand. So, the new equilibrium price is indeterminate.