Use supply and
demand curves to illustrate how each of the following events would affect the
price of butter and the quantity of butter bought and sold: a. An increase in the price of margarine. b. An increase in the price of milk. c. A decrease in average income levels. ANSWER a. An increase in the price of margarine. Butter and margarine are substitute goods for most people. Therefore, an increase in the price of margarine will cause people to increase their consumption of butter, thereby shifting the demand curve for butter out from D1 to D2 in Figure 2.2.a. This shift in demand causes the equilibrium price of butter to rise from P1 to P2 and the equilibrium quantity to increase from Q1 to Q2. Figure 2.2.a b. An increase in the price of milk.
Milk is the main ingredient in butter. An
increase in the price of milk increases the cost of producing butter, which
reduces the supply of butter. The supply curve for butter shifts from
Figure 2.2.b
Assuming that butter is a normal good, a decrease in average income will cause the demand curve for butter to decrease (i.e., shift from D1 to D2). This will result in a decline in the equilibrium price from P1 to P2, and a decline in the equilibrium quantity from Q1 to Q2. See Figure 2.2.c.
Figure 2.2.c
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