Review the role of demand elasticity in a supply shock

Reference no: EM131500525

Question: Review the role of demand elasticity in a supply shock.

a. Draw a graph of the supply and demand for one good. Label the supply curve S¹ and the demand curve D¹. Label the axes and the initial equilibrium.

b. Draw a second demand curve that shows the consumer with a less elastic demand curve, that has the same equilibrium as S¹ and D¹. Label it D².

c. Assume a supply shock, such as favorable weather, that increases the supply of a good. Draw the new supply curve, labeled S², and label the two new equilibrium along D¹ and D²

d. In a paragraph,

(1) explain the difference between the two market equilibrium and

(2) identify the elasticity parameters in a CGE model that can cause D² to be more elastic than D¹.

Reference no: EM131500525

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