Question

General Conceptual Questions 1. Suppose you are studying the market for ping pong balls. You know that one of the two curves that describes this market is defined by the equation Q = 10 - 3P. Is this more likely to be the supply curve or the demand curve? Explain what, mathematically, justifies your answer. Then explain the economic intuition: why do demand or supply curves generally have this feature? (Hint: In other words, why is it that quantity supplied/demanded increases/decreases with the price?) Suppose Congress wants to cut the consumption of gin. But since the Supreme Court ruled a tax on gin an unconstitutional limitation on the right to bear alcohol, taxing or otherwise directly limiting the consumption of gin is illegal. According to the theory of complementary goods, how can the government achieve its goal without violating the ruling? (Hint: Gin is often consumed with tonic, a non-alcoholic beverage.) Suppose you and your friends look up the prices and quantities of Ramen noodles consumed in the U.S. over the last 10 years. (See figure below.) Your friend Timmy claims this traces out the demand curve. Your friend Wahida claims this traces out the supply curve. Which, If either, is correct? Why? (Hint: What determines the price and quantity that actually prevails in a market?) Price Quantity

Answer 1

1)As per the equation Q =10-3p, we find that ,it is certainly the demand equation and likely to be the demand curve.

The reason behind is ,as per the law of demand ,there is can inverse relationship between price and quantity demanded ,that is quantity demanded decreases with the rise in its price.

If we put the value of p = 1,2,3......,we find the following result------

P. Q=10-3p

1. 10-3×1=7

2. 10-3×2=4

3. 10-3×3=1

As per the table ,with the increase in price,q decreases.so the law of demand is justified.

Similarly, as per the law of supply ,there is a direct relationship between price and quantity supplied.

The demand and supply curves often have this feature because ,a consumer is willing to buy more quantity only when there is a reduction in its price.The reason is ,diminishing marginal utility that is ,utility decreases with the consumption of additional unit of commodity.

Similarly ,a supplier is willing to supply more goods only when he gets more price for it.because it will increase his profit margin.

2)If the govt wants to limit the consumption of gin,without violating the rule ( by taxing gin), the govt has one option to achieve this target.

There is also mentioned that ,gin is consumed with a non alcoholic beverage.so ,this beverage is complementary to the consumption of gin .If govt increases the price of this beverage ,people prone to gin consumption will reduce its consumption

The logic behind is ,when the price of complementary good increase, the demand of other good decreases.It is called cross price effect, as shown in the below diagram

3)The given diagram doesnot exactly specifies any of the curves.Neither demand curve nor supply curve.

law of Demand BEVERAGE PRICE Price Gin *x Quantity of Gin Quantity demanded of Gin decreases with the increase of price of beverage (the complementary good)

Because ,to be a demand curve ,there must be a curve sloping downward from left to right.

Similarly, to be a supply curve, there must be a curve ,sloping upward from left to right .

The price and quantity which actually prevails in the market depends upon the demand and supply forces.

That is price and quantity is determined where the demand curve intersects the supply curve.