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In the aftermath of the devastating hurricane Sandy in the Northeast and Jersey Shore, prices of certain goods had risen dramatically.  Some people had objected to these price increases, and called for the government to forbid sellers from charging such high prices. This exercise asks you to apply economic principles in explaining why prices tend to rise, and what consequences would result from forbidding sellers from raising prices.  We will consider the case of bottled fresh water being available for sale in supermarkets.1) Draw a graph showing the equilibrium price for the pre-hurricane demand for and supply of bottled water that currently existed in the market place. (label the current equilibrium price as p1 on the price axis, and the quantity as q1 on the quantity axis. Now suppose that the hurricane hits.  One effect is to hinder delivery trucks from bringing as much water as before and the need for additional water supplies, so the supply of and demand for bottled water will be affected.2) Draw a new supply and demand curve to illustrate this change in supply and demand, and label the new Supply curve S2 and the new Demand curve D2. 3) Explain and graph the effect on price and quantity if the government establishes a price ceiling at a price below the new market equilibrium price?

Question

In the aftermath of the devastating hurricane Sandy in the Northeast and Jersey Shore, prices of certain goods had risen dramatically.  Some people had objected to these price increases, and called for the government to forbid sellers from charging such high prices. This exercise asks you to apply economic principles in explaining why prices tend to rise, and what consequences would result from forbidding sellers from raising prices.  We will consider the case of bottled fresh water being available for sale in supermarkets.

1) Draw a graph showing the equilibrium price for the pre-hurricane demand for and supply of bottled water that currently existed in the market place. (label the current equilibrium price as p1 on the price axis, and the quantity as q1 on the quantity axis. 

Now suppose that the hurricane hits.  One effect is to hinder delivery trucks from bringing as much water as before and the need for additional water supplies, so the supply of and demand for bottled water will be affected.

2) Draw a new supply and demand curve to illustrate this change in supply and demand, and label the new Supply curve S2 and the new Demand curve D2. 

3) Explain and graph the effect on price and quantity if the government establishes a price ceiling at a price below the new market equilibrium price?

check_circleAnswer
Step 1

taking quantity demanded and supplied of waterbottles on x axis and the price of the same on y axis, the graph looks like:

Price
SS
P1
DD
Quantity supplied and demanded
Q1
Pre hurricane scenario
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Image Transcriptionclose

Price SS P1 DD Quantity supplied and demanded Q1 Pre hurricane scenario

fullscreen
Step 2

due to hurricane, the supply gets affected and the demand of the bottles increases. the s...

S2
Price
ss
P1
D2
DD
Quantity supplied and demanded
Q1
Post hurricane scenario
help_outline

Image Transcriptionclose

S2 Price ss P1 D2 DD Quantity supplied and demanded Q1 Post hurricane scenario

fullscreen

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