How will a change in the price of coffee affect the equilibrium price of tea? Explain the effect on equilibrium quantity also through a diagram.
Coffee and tea are substitute goods, i.e. they are used in the place of each other. An increase or a decrease in the price of coffee will lead to an increase or a decrease in the demand for tea respectively. The figure depicts the equilibrium of the tea market. The initial demand and supply of tea is depicted by D1D1 and S1S1 respectively. The initial equilibrium is at E1 with the equilibrium price (pe) and equilibrium quantity (qe). Now the price of coffee increases, which will lead to an increase in the demand of tea (being a substitute good), the demand curve of tea will shift rightward parallelly. At the equilibrium price (Pe), there will be an excess demand for tea, consequently, the price of tea will rise. This will form the new equilibrium at E2 with the new equilibrium price P2 and the new equilibrium output q2. Hence, an increase in the price of coffee will lead the equilibrium price of tea to rise (due to excees demand). Further the increase in the price of coffe will also lead to the increase in demand for tea as tea is the substitute good and coffee. Now, if the price of coffee decreases, there will be a decreases in the demand for tea. The demand curve for tea will shift leftward parallelly to D2D2. At the equilibrium price (Pe) there will be an excees supply. Consequently, the price of tea will fall, which will form the new equilibrium at E2 with new equilibrium price P2 and the new equilibrium output q2. Hence a decrease in the price of coffee will lead to a decrease in the price of tea and a decrease in the demand for tea as people will switch over to consumption of coffee.
What is the supply curve of a firm in the long run?
The market price of a good changes from Rs 5 to Rs 20. As a result, the quantity supplied by a firm increases by 15 units. The price elasticity of the firm’s supply curve is 0.5. Find the initial and final output levels of the firm.
A firm earns a revenue of Rs 50 when the market price of a good is Rs 10. The market price increases to Rs 15 and the firm now earns a revenue of Rs 150. What is the price elasticity of the firm’s supply curve?
Distinguish between a centrally planned economy and a market economy.
How does the imposition of a unit tax affect the supply curve of a firm?
A consumer wants to consume two goods. The prices of the two goods are Rs 4
and Rs 5 respectively. The consumer’s income is Rs 20.
(i) Write down the equation of the budget line.
(ii) How much of good 1 can the consumer consume if she spends her entire
income on that good?
(iii) How much of good 2 can she consume if she spends her entire income on
that good?
(iv) What is the slope of the budget line?
Questions 5, 6 and 7 are related to question 4.
What is the relation between market price and average revenue of a price-taking firm?
What is budget line?
Suppose there are 20 consumers for a good and they have identical demand functions:
d(p)=10–3pd(p)=10–3p for any price less than or equal to 103103 and d1(p)=0d1(p)=0 at any price greater than 103.
Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?
What do the long-run marginal cost and the average cost curves look like?
What is the average product of an input?
Suppose the demand and supply curve of commodity XX in a perfectly competitive market are given by:
qD =700 - p
qs = 500 + 3p for p ≥ 15
= 0 or 0 ≤ p <15
Assume that the market consists of identical firms. Identify the reason behind the market supply of commodity X being zero at any price less than Rs 15. What will be the equilibrium price for this commodity? At equilibrium, what quantity of X will be produced?
Suppose the demand and supply curves of salt are given by:
(a) Find the equilibrium price and quantity.
(b) Now, suppose that the price of an input that used to produce salt has increased so, that the new supply curve is qs = 400 + 3p
How does the equilibrium price and quantity change? Does the change conform to your expectation?
(a) Suppose the government has imposed at ax of Rs 3 per unit of sale on salt. How does it affect the equilibrium rice quantity?
What is the supply curve of a firm in the short run?
How is the equilibrium number of firms determined in a market where entry and exit is permitted?
Why is the short-run marginal cost curve 'U'-shaped?
Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?
What is the value of the MR when the demand curve is elastic?
At which point does the SMC curve intersect the SAC curve? Give a reason in support of your answer.