Question

Q7

(20 marks) Suppose the market for disposable gloves is competitive and it is originally operating at the long run equilibrium. An important raw material of producing disposable gloves is natural rubber. Suppose there is a drastic increase in the price of natural rubber. a. With the aid of side-by-side diagrams, explain the impacts of the above change on the equilibrium price and equilibrium quantity in the market for disposable gloves, as well as the profit maximizing output level of a typical producer of disposable gloves in the short run. (For the sake of simplicity, do NOT draw the AC curve in your answers.) (12 marks) b. Would the above change in cost in (a) lead to a profit or a loss to a typical producer? What will happen to the market price in the long run? Explain briefly in your words. (4 marks) Explain TWO reasons why we might take the market for disposable gloves as a competitive market. (4 marks)

Answer 1

It price of natural rubber increases; a) The 2 which cost of production will decrease Subbles will increase of disposable gloves. o Thus, supply curve will Shift "leftward. A In the diagram, Price DD and so are original demand and supply curves When supply dec- reases & Supply curve will shift leftward & - Quantity now becomes s's!! I There will be problem of "excess demand". This, competition between buyers will increase They are reeady to pay higher price. Seller will increase the price. When price increases, there will be contraction in demand (law of domar Woo
  
and extension in supply (due to law of supply Equilibrium twice be achieved - Now, equilibrium price will become OP2 and equilibrin qty will be OQ, so equilibrium price will increa- Se and ego qty will decrease - Profit maximizing Output The profil max- umiging output level is OQ, where op is the ad price - wint Price X- MR to cush hoomoh ni Output

UNEYAAD NO TIDAL b) The producer will suffer increase in cost of The market price run will increase . loss due to production. in the long c) Reasons for taking the market for gloves as comptt mkt :- is large number of buyers and selless. (5) Price of different seller will be different C) Selling cost will exist.