Topics: Supply and demand, Good, Price point Pages: 3 (683 words) Published: April 13, 2013
Answer the following questions:
Question One:
Explain why each of the following two statements is False: (Assume that all variables are kept constant in all the 3 statements below)
Statement (1):If the price of shoes decreases, then the demand on socks will decrease as well because the two goods are complement goods.

This statement is false : because they are complement goods so is the price of (x) which is shoes decreases the quantity demand of (y) which is socks must increases. In other words the price of shoes decreases the demand on socks must increase.

Statement (2): A tax imposed on furniture production in an economy (X) will lower the price of furniture in the market because demand on furniture will decrease due to this tax.
This statement is false: because since a tax was imposed on furniture production in an economy (x) it will increase the price of furniture in the market

Statement (3): An flood in the cotton-growing regions in Australia will lower the prices of cotton because demand on cotton decreases.

This statement is false because a flood will higher the price of cotton, there well be shortage in the market of cotton because the flood destroys all of it. The price of cotton will increase whearese the quantity demand of the cotton will decrease and the quantity supply will increase. So the market will have to higher the price in order to maintain equilibrium.

In your explanation, you need to explain and express the correct wording of the above statements. Graphs must be provided with your explanation for each statement.

Question Two:
Study the effect in words and graph of the following events on market equilibrium using the 3-step DD-SS analysis:

Effect of a decrease in prices of wool sweaters on the market of leather jackets.

Step One:- Price of relating goods (substitutes) is the factor effecting the Demand curve. Step Two:- if price of wool sweaters decrease, then the quantity demand of...
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