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1. QUESTION

About demand and supply In 2006, the average price for a daily edition of Baltimore newspaper was \$0.5. In 2007, the average price had risen to \$0.75. Three different analysts gave three different explanations for the higher equilibrium price. Analyst 1: The higher price for Baltimore newspapers is good news because it means the population is better informed about public issues. These data clearly show that the citizens of Baltimore have a new and increased regard for newspapers. Analyst 2: The higher price for Baltimore newspapers is bad news for the citizens of Baltimore. The higher cost of paper, ink and distribution reflected in these higher prices will further diminish the population’s awareness of public issues. Analyst 3: The higher price for Baltimore newspapers is an unfortunate result of newspapers trying to make money as many consumers has turned to the Internet to access news coverage for free. As economists, answer the following questions: a) Do the above 3 explanations make sense based on what we know about economic principles? If they do make sense, can you figure out which explanation applies to the case of rising newspaper prices in Baltimore? b) Among the explanation which make sense, who is right if quantities of newspapers bought have been falling c) Is it possible that two of the analysts are correct? Explain with an example.

Subject Pages Style Business 5 APA

Supply and Demand Questions

1. We First analyze explanations by each analyst and make a comparison with Demand and Supply Curve rules
1. Analyst 1

The analyst solution provides that the newspapers demand increased, and as such pushing the demand curve to shift to the right side, leading to a rise of Price and Q values along the Supply-Demand curve as seen in figure 1 below. This solution is reasonable because it follows the demand curve rule and indicates the true change in price, which leads to an increase in demand. Therefore, it is applicable in the Baltimore case.

1. Analyst 2

The second analyst solution provides that the newspaper demand declined as a result of a price rise, consequently pushing the supply curve to shift towards the left, leading to a rise in price and a drop in Q alongside the Supply-Demand curve as seen in the figure below. This conclusion is also reasonable because it adheres to the supply curve rules and indicates the true change in price, however, unlike in the analyst case, it leads to a drop in demand. Therefore, the conclusion applies to Baltimore.

1. Analyst 3

The third analyst provided that the newspaper demand declined as people moved from e-newspapers and as a result pushing the demand curve to shift left side, dropping both P and Q along the supply-demand curve as seen in the figure below. This conclusion is not reasonable because it does not indicate the true price change. It is not applicable to the Baltimore case.

1. If the sales of the newspapers were declining, then the conclusion by the second analyst is the correct one.
2. Yes, both analyst 1 and 2 conclusions can be correct because they reflect the actual change in the newspaper prices. However, the analysts conflict in regards to the effect of an increase in price on demand, with analyst 1 suggesting a rise in demand and 2 a decrease in demand. To determine the correct one, we need to gather data to reveal whether the actual demand declined or increased.

Analyst 1 conclusion example:

Two competing companies’ sell gold chairs. One company goes bankrupt and ceases operation. The other company increases old chair prices due to increased demand. The company demand then shifts to the right leading to an increase of both Q and P as seen below.

Analyst 2 Conclusion Example

A company manufactures toys, the plastic prices goes up pushing the prices of the toys up, and consequently, the supply curve shifts to the left, leading to a rise in P and a drop in Q as seen below.