Eco 3305 Managerial Economic

1)

The market for milk is in equilibrium. At the equilibrium price, the amount that people are willing to buy equals the amount that suppliers are willing to offer, which also is the equilibrium quantity. Recent health reports have a positive impact on the general consumers’ taste and preference for milk. Then, the demand curve will shift to the right. In addition, the cost of milking equipment rises, which means an increase in unit cost. This will lead to a decrease in market supply, and the supply curve will shift to the left. We have the equations which represent for the demand curve (D) y = mx + b; and the supply curve (S) y = nx + c. There are three possibilities in this case.</p>

The first possibility is the demand curve shifts rightward and the supply curve shifts leftward at the same vertical amount. This means b and c, the y-intercepts of (D) and (S), will increase at the same amount. The intersection point between (D) and (S) will have the same x-coordinate and a larger value for y-coordinate. In other words, the new equilibrium will have the unchanged equilibrium quantity but a larger equilibrium price.</p>

Secondly, the demand curve shifts rightward at a greater vertical amount, comparing to the leftward shift of the supply curve. In this case, the value of b will be greater than the value of c. The new equilibrium point will have a greater equilibrium price and a greater equilibrium quantity as well. </p>

Lastly, the demand curve shifts rightward at a less vertical amount, comparing to the leftward shift of the supply curve. The value of b will be less than the value of c. The new equilibrium point will have a greater equilibrium price but a lower equilibrium quantity.</p>

In conclusion, such changes will create a new equilibrium point. The equilibrium price will be higher for certain. However, the effect on the equilibrium quantities is various. It could become greater than, less than, or equal to the original value of...