Questions
1 Assuming butter is sold in a purely competitive market; use the supply and demand diagram to describe, ceteris paribus, the major factors contributing to the nationwide butter shortage and its impact on equilibrium price and quantity. In your discussion make sure to explain the process of moving to the new equilibrium output and price. (5 marks)
2 (a) Using the determinants of price elasticity of demand, discuss whether you think the elasticity of demand for butter to be inelastic or elastic? (4 marks)
(b) If the market demand for baked goods is price inelastic explain what will happen to the total consumer expenditure in that market stemming from the butter shortage. Specify any assumptions you make. (6 marks)
3. Use the supply and demand diagram to explain the impact on at least two other markets affected by the butter shortage and where the equilibrium outcomes are different. In your discussion specify your assumptions and explain the equilibrating process in the related market(s) in terms of the new equilibrium output and price and how they differ. (7 marks)
Your assignment will also be assessed on how effectively you can communicate with the reader; i.e. how well you have presented your arguments and ensured your analysis is logical and consistent.
Consequently, 3 marks will be awarded for effective writing including proper grammar, referencing and formatting. Importantly, make sure you use appropriate diagrams in your analysis. Please check the FAQs for Assignment 2 if you have further questions on this assignment.