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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Because bagels and cream cheese are often eaten together, they are complements.

a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What could be responsible for this pattern—a fall in the price of flour or a fall in the price of milk? Illustrate and explain your answer.

b. Suppose instead that the equilibrium price of cream cheese has risen but the equilibrium quantity of bagels has fallen. What could be responsible for this pattern—a rise in the price of flour or a rise in the price of milk? Illustrate and explain your answer.

Subpart (a):

To determine
The change in input prices and its related effects in the market.

Explanation

Figure -1 illustrates the change in equilibrium due to changing the supply and demand curve.

Figure 1 and figure 2 illustrate how the fall in the price of flour affects the bagels and cream cheese markets. The vertical axis in figure1 represents the price of bagel and in figure 2 represents price of cream cheese. The horizontal axis in figure 1 represents the quantity demanded and supplied of bagel and in figure 2 represents the quantity demanded and supplied of cream cheese.  From figure 1, it can be inferred that flour being an ingredient in bagel, we notice a fall in the price of flour (fall in input price) and that results in a rise in the supply of bagels which shift the supply curve of bagels to the right. The result is a fall in the equilibrium price of bagels with a rise in the equilibrium quantity.

Since the bagels and cream cheese are complements, the fall in the price of bagels increases the demand for cream cheese...

Subpart (b):

To determine
The change in input prices and its related effects in the market.

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