Business Economics For Microeconomics Answers Assessment Answer

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The above diagram shows that the supply of cream cheese has decreased due to the increase in the price of milk.

Figure 2: Demand curve of bagel

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The diagram shows that the demand curve of bagel has shifted towards the left from D2 to D1 due to the increase in the price of its complementary good (cream cheese).

On the other hand, the increase in the price of flour will also lead to the decrease in the equilibrium quantity of bagels. However, it will not be able to explain the increase in the price of cream cheese (Berry et al. 2013).

1 (b)

A price floor will have an impact on the market if it is greater than the equilibrium price in the market. Price floors are the minimum price that is imposed by the government for certain products and services that they feel are being sold in the inequitable market. An inequitable market is the market where the products are sold at a very lower price. Since, the equilibrium of cream cheese had increased hence; price floor will proof to be incompetent (Dragusanu et al. 2014).

Figure 3: The price floor

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If the price floor is set above the market price, then there will be an excess supply and surplus in the market. This will yield an inefficient outcome if there is no sufficient demand as compared to the excess supply. The producers will gain only if their supply curve that is relatively elastic. The consumers are mostly affected, as they will be priced out of the market. In other words, they have to pay a higher price than before. As a result, the government will face a number of strategies for setting a price floor. Price floor will make it impossible for the producers to sell their goods at the unrestrained price. As a result, the producers starts competing by incompetently increasing the quality of the goods (Schlee 2013).

2.

The substitute goods are those goods that can be used in the place of another good to meet the demand of a customer. Demand for a given product varies directly with the price of the substitute product. In this case, after carrying out the investigation it has been found that Horse-Energy bars and the Choco bars are substitute goods. Both the goods are grouped in the similar category and they accomplish the same basic function. As a result, the increase in the price of Horse-Energy Bars will lead to the increase in the demand of the Choco bars (Rosato 2013).

Figure 4: The substitute goods

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The graph shows that the demand of Choco Bars will increase with the rise in the price of Horse-Energy. The price of Horse-Energy is represented in the Y-axis and the quantity of Choco bars is represented in the X-axis. Both the goods are elastic goods that is they have elastic demand. Hence, the customers are very sensitive to the change in the price (Patinkin 2013).

Figure 5: The price and quantity of Horse-Energy

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In both the diagrams, it can be seen that the major variable that shifts the demand curve is the price of the related goods. On the other hand, if the price of Horse-Energy decreases, then the demand of Choco Bars will also increase. This is because the preference of the customers will due to the change in price.

References

Berry, S., Gandhi, A. and Haile, P., 2013. Connected substitutes and invertibility of demand. Econometrica, 81(5), pp.2087-2111.

Dragusanu, R., Giovannucci, D. and Nunn, N., 2014. The economics of fair trade. The Journal of Economic Perspectives, 28(3), pp.217-236.

Patinkin, D., 2013. The role of the “liquidity trap” in Keynesian economics.PSL Quarterly Review, 26(108).

Rosato, A., 2013. Selling substitute goods to loss-averse consumers: Limited availability, bargains and rip-offs.

Schlee, E.E., 2013. Surplus maximization and optimality. The American Economic Review, 103(6), pp.2585-2611.

Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.