Question

Consider the market for bagels, which is currently at equilibrium, and where Pbagel and Qbagel denote the price and quantity of bagels in the market, respectively. If the change given in each problem is the only change that happened (all other things are held constant), what will be the effect on the equilibrium price and quantity of bagels? Please draw a graph to explain.

A) The price of cream cheese, complementary goods to bagels, increases.
B) The price of croissants, substitute goods to bagels, decrease
C) The economy experiences an overall decrease in income (Suppose that bagel is an inferior good).

Answer 1

please refer to attachment for more explanation

Step-by-step explanation:

a. a. Since both goods are complementary goods an increase in the price of cream cheese would cause equilibrium price and quantity of bagel to decrease.

b. If the price of the substitute good croissant decreases then the demand for bagel will fall since croissant is obviously cheaper therefore demand curve will shift downward and price and quantity will fall.

c. Lower income of the consumer would make the demand for the inferior good bagel to rise. Demand curve will shift upwards and price and quantity will rise.