Answered: 1. This assignment further explores how…

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter4: Demand, Supply, And Market Equilibrium

Section: Chapter Questions

Problem 25P

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Transcribed Image Text:1. This assignment further explores how demand and supply shocks effect the equilibrium price in a market. Imagine that the market for acoustic guitars is described by the following demand and supply curves: Qa = A - P Qs = B + SP a. Find the equilibrium price and quantity in the market. b. Form the inverse supply and demand functions and, Interpret the terms A and -B/8. f. Where A > 0, B < 0,8 > 0. C. Explain why the emergence of a market for guitars requires the following: A> -B/8 > 0. d. Interpret the parameter & and, provide examples of when it is low or high. e. Suppose that master guitarist Julian Lage gives a performance that goes viral on YouTube. His amazing virtuosity sparks a massive increase in the demand for guitars. How would this shock be captured by the parameter A. Draw the supply and demand curves before and after the shock and show how the equilibrium changes. Based on your graph what, if anything, can you say about how the equilibrium price and quantity change? Now let's consider the magnitude of the shock. Suppose that B = 5 and A = 10 before Lage's concert and A = 15 after the concert. What is the impact of the shock as captured by the increase in A on the equilibrium price and quantity?. How does your answer depend on the parameter 8? Explain the economic intuition. g. Suppose there is breakdown of supply chains for the rare brand of wood that is used for making high quality guitars. How would this shock be captured by the parameter B. Draw the supply and demand curves before and after the shock and show how the equilibrium changes. Based on your graph what, if anything, can you say about how the equilibrium price and quantity change?

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