Assume that hotdogs and hamburgers are substitute goods. In the competitive mark
ID: 1226100 • Letter: A
Question
Assume that hotdogs and hamburgers are substitute goods. In the competitive market for hamburgers, there is an increase in the price of hotdogs (due to a decrease in the supply of hotdogs), and an increase in the cost of beef, an input used in production to make hamburgers. What happens to the equilibrium price and quantity of hamburgers? Use supply and demand analysis to demonstrate your answer (using graphs). Be sure to provide the intuition behind what is happening and also discuss any interesting observations or outcomes.
Explanation / Answer
When there is increase in price of hotdogs, the demand of hotdogs will decrease as the people will move towards consuming more quantity of hamburgers i.e., the demand of hamburgers will increase. Simultaneously, if there is increase in the price of input (beef) used in production to make hamburgers then the supply of hamburgers will decrease due to high cost of production.
On the one hand, Demand of hambugers is increasing due to increase in price of hotdogs (Substitute goods) and on the other hand, Supply of hambugers is decreasing due to increase in prices of input used in the production of habmburgers. This simultaneous increase in demand of hamburgers and decrease in supply of hamburgers will cause equlibrium price to increase and there will be no change in equilibrium quanity of hamburgers i.e., neither there will be increase in the equilibrium quanity of hamburgers nor there will be fall in the equilibrium quanity of hamburgers
Conclusion:- The equilibrium price of hamburgers will rise / increase and there will be no change in equilibrium quantity of hamburgers i.e., equilibrium quantity of hamburgers neither rise nor fall.