Each question is of equal value and worth 2 1/2 marks

 

 

 

Draw demand and supply diagram to answer all questions.  Explain in your answers the process by which the results come about.

 

 

 

(a)     Rice and soy-sauce are complements, what would happen to the short-run equilibrium price and quantity of rice if the price of soy-sauce increased?

 

 

 

           Answer: Because rice and soy-sauce are complements, when the price of soy-sauce increased while the other conditions kept the same, the demand of rice decreased, that is decreasing Q1 to Q2, the demand curve of rice would move from D1 to D2 as diagram shown below. But the supply of rice did not change, the supply curve stayed the same. When the market reached equilibrium, equilibrium quantity (Q1 decreased to Q2) and the price (P1 decreased to P2) would decrease.  

 

  

 

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(b)     What would happen to the short-run equilibrium price and quantity of lamb if most of the Australian beef cattle herd had to be destroyed due to mad-cow disease?

 

 

 

          Answer: Because lamb and beef are substitute, when the demand of beef decreased, the demand of lamb would increase from Q2 to Q1, the demand curve would move from D2 to D1 as diagram shown below. Because the supply of lamb did not change, the supply curve stayed the same, when the market reached equilibrium, the equilibrium price would increase from P2 to P1, the equilibrium quantity would increase from Q2 to Q1.

 

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(c)      What would happen to the short-run equilibrium price and quantity of beef following the destruction of the beef cattle?

 

 

 

          Answer: When the beef cattle were destructed, the supply of beef cattle would decrease from Q1 to Q2, the supply curve of beef cattle moved from S1 to S2. The demand did not change while the other conditions kept the same, when the market reached equilibrium, the equilibrium price would increase from P1 to P2, the equilibrium quantity would decrease from Q1 to Q2.

 

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