Question

Figure below represents two different shifts that occur in the market for potato chips. All of the shifts go from the curves labeled with a "1" to curves labeled with a "2". Assume that potato chips are an inferior good. Refer to the figure as you answer the questions that follow.

1. Only considering Shift 1 shown on the left-side graph, what would cause this shift to happen?
-An increase in the price of french fries, which are a substitute for potato chips
-An increase in the price of dip, which is a complement for potato chips
-An increase in consumer income (look at the description of potato chips in the prompt above)
-A decrease in the price of potatoes, which are an input for potato chips
-A decrease in the number of firms in the market
-An improvement in the technology used to produce potato chips

2. Only considering Shift 2 shown on the right-side graph, what would cause this shift to happen?
-A decrease in the price of french fries, which are a substitute for potato chips
-A decrease in the price of dip, which is a complement for potato chips
-An increase in consumer income (look at the description of potato chips in the prompt above)
-An increase in the price of potatoes, which are an input for potato chips
-An increase in the number of firms in the market
-An improvement in the technology used to produce potato chips

3. If these two shifts occur at the same time, what will happen to the equilibrium price (P*) and quantity (Q*)? Assume that you do not know anything about the sizes of the shifts.
-P* will increase and Q* will increase
-P* will increase and Q* will decrease
-P* will decrease and Q* will increase
-P* will decrease and Q* will decrease
-P* will decrease; the effect on Q* is ambiguous
-P* will increase; the effect on Q* is ambiguous
-Q* will decrease; the effect on P* is ambiguous
-Q* will increase; the effect on P* is ambiguous

Answer 1

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Explanation:

Shift 1, shown on the left-side graph, indicates a shift in either the demand or supply curve for potato chips. This shift could be caused by factors such as changes in the price of substitute goods (e.g., french fries), complement goods (e.g., dip), consumer income, input prices (e.g., the price of potatoes), the number of firms in the market, or technological advancements in production.

Shift 2, shown on the right-side graph, also indicates a shift in either the demand or supply curve for potato chips. Similar factors to Shift 1 could be responsible for this shift.

When these two shifts occur simultaneously, the impact on the equilibrium price (P*) and quantity (Q*) of potato chips will depend on the relative magnitudes of the shifts. If the shift in demand is larger than the shift in supply, P* will increase, and Q* will decrease. Conversely, if the shift in supply is larger than the shift in demand, P* will decrease, and Q* will increase. If the shifts in demand and supply are equal in magnitude, the effect on P* and Q* will be ambiguous and could go either way or remain unchanged.

Please note that without specific information about the magnitudes of the shifts, it is not possible to determine the exact impact on P* and Q*.

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