Question

1. Cotton shirts are a normal good, made from cotton thread, which is made from cotton. Silk shirts are also normal goods made from silk thread, which is made from silk. Cotton shirts and silk shirts are substitutes in consumption. If there is a reduction in the supply of silk what happens to equilibrium price and output for: a) Silk b) silk thread, c) silk shirts, d) cotton shirts, e) cotton thread f) cotton? 2. Suppose demand for a good is given as: P = 300 - 25Q and Supply for that good is given as: P = 50 +0.25Q. a) What are the initial equilibrium values for price and output? b) Given the results in a, what happens if Supply changes to: P = 100+ 0.25Q? c) Given the results in b, what happens if Demand changes to: P = 200 -0.25Q?

Answer 1

1.

a. The equilibrium price for silk will increase and output for silk will decrease.

b. The equilibrium price for silk thread will increase and the output will decrease.

c. The equilibrium price for silk shirts will increase and the output will decrease.

d. The equilibrium price for cotton shirts will decrease and their output will increase.

e. The equilibrium price and output for cotton thread will remain same as there will be no change in it.

f. The equilibrium price and output for cotton will remain same as there will be no change in it.

2.

a. Equilibrium = demand = supply

Qd = Qs

1200-4P = 4P-200

P = 175

Q = 500

b. New equilibrium

1200-4P = 4P-400

P = 200

Q = 400

c. New equilibrium

800-4P = 4P-400

P = 150

Q = 200

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