Market of permanent reduction in market demand

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Reference no: EM13898593

1. Starting from a long run equilibrium, trace the effects for both a competitive firm and the market of a permanent reduction in market demand for:

a. A constant cost industry.

b. An increasing cost industry.

2. Consider two consumers, John and Maria, each with an quantity of two goods: corn and sugar.

a. John has 30 gallons of gasoline (G) and 20 bags of sugar (S); for that basket of goods, his MRS(GS) is 1G/5S. Maria has 30 gallons of gasoline (G) and 50 bags of sugar (S); for that basket, her MRS(GS) is 1G/1S. Note then that the economy's total G = 60 and total S = 70. Are there gains to be had for both John and Maria from trading? Who would trade what to realize gains? Explain and illustrate using an Edge worth box diagram.

b. Suppose now that John has 40 G and 0 S and that his MRS(GS) is 1G/1S. Maria has 20 G and 70 S and her MRS (GS) is 3G/1S. Are there gains to be had for both John and Maria from trading? Explain and illustrate using an Edge worth box.

Reference no: EM13898593

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