the price elasticity of demand for ergonomically designed back packs
Suppose the price elasticity of demand for ergonomically designed back packs (book bags) is 1.5 and the price elasticity of supply is 0.5. The initial equilibrium price per ergonomically designed back pack is $150 and the initial equilibrium quantity bought and sold is 5,000 back packs per month.
- Draw a graph, properly labeling the axes, showing the initial equilibrium price and quantity in the market for ergonomically designed back packs. Draw the demand and supply curves to reflect the respective price elasticities of demand and supply (slopes) noted above.
- Now suppose that, owing to hurricanes, factories in areas where ergonomically designed back packs are produced became flooded, resulting in the supply of such back packs declining by 50 percent. Illustrate the decrease in supply on the graph you drew in part (A) above (you do not have to draw the halving of supply to scale).Label the new supply curve S2.
- As a result of the decrease to supply in Part B above, what will be the:
(i) Percentage change in the equilibrium price of an ergonomically designed back pack?
(ii) Dollar change in the equilibrium price of an ergonomically designed back pack?
(iii) New equilibrium price of an ergonomically designed back pack?
(iv) Show the new equilibrium price on the graph you drew in Parts (A & B) above.
- As a result of the reduction in supply in Part B above, what will be the:
(i) Percentage change in the equilibrium quantity of ergonomically designed back packs?
(ii) Unit change (number of back packs) in the equilibrium quantity of ergonomically
designed back pack?
(iii) New equilibrium quantity of ergonomically designed back packs?
(iv) Show the new equilibrium quantity on the graph you drew in Part (A) above.
- Total consumer spending on ergonomically designed back packs will (circle one)
decrease, increase, stay the same to $ ________________________.