Share
Explore BrainMass

new equilibrium

Assume that S and D are neither perfectly elastic nor perfectly inelastic. Assume that market for Jelly is initially in equilibrium. Let's call this initial equilibrium price and quantity as P1 and Q1 respectively.

a)Explain what will happen to demand for Jelly if the price of peanut butter ( a complimentary good) has dropped. Will the demand curve shift? If so, which way and why?

b)Will the new equilibrium price will be higher or lower than the old? How will the new equilibrium quantity differ from the old? (if you like you can call this new equilibrium as P2 and Q2)

c)Explain what will happen to supply of Jelly if the input prices increase. Will the supply curve shift? If so, which way and why?

d)Call this new equilibrium as P3 and Q3. Will P3 and Q3 be higher or lower than P1 and Q1 respectively?

Solution Preview

a)Explain what will happen to demand for Jelly if the price of peanut butter ( a complimentary good) has dropped. Will the demand curve shift? If so, which way and why?
Decrease in price of a complimentary good will shift the demand curve to the right. This is because the consumers are willing to buy more Jelly at every price point as the price of ...

Solution Summary

The new equilibrium price is assessed. The expert explains what will happen to demand for Jelly if the price of peanut butter has dropped.

$2.19