dolution

 

1. See the diagrams in the next column of this page. Consider the supply-and-demand diagrams depicting the markets for X andrespectively. In the market for good X, supply is perfectly elastic,

indicating that producers are prepared to supply any amount of at price p0.

 

 

 

a. In the market for X, demand increases from D0 to D1 Explain what happens to the total value that consumers place on X.

 

b. Explain how the increase in demand for X affects the marginal value that consumers place on X.

 

c. In the market for Y, a technological improvement causes supply to increase from S₀ to S₁, causing price to   fall from p₀ to p₁.Explain what happens to the total value that consumers place on a given quantity of Y.

 

d. Explain why the increase in supply leads consumers to reduce their marginal value of Y even though there has been no change in their preferences regarding Y (and thus no shift in the demand curve).