Answer to Question #194558 in Microeconomics for Ruchi Chataut

Question

Draft a graph which shows the law of supply and demand to explain to conditions as below:

You are operating a budget hotel. Coincidently, this is matching the trend/ popularity that a large group of budget concerned travellers are seeking for the stay which charge lower room rates.

Government has announced to subsidise for the firms which are involving in tourism industry.

Government has implemented the increase of company tax for 2% as to raise the fund to develop the infrastructure of the nation.

Surge in household disposable income.

Answer 1

(1).

If the demand for the hotel is matching the current trend/popularity then the demand for the hotel will increase. As a result, the demand curve will shift to the right. Due to this the equilibrium quantity and equilibrium price both will increase.

Graphical presentation:

According to the above figure, the x-axis measures the quantity of the hotel, and the y-axis measures the price of the hotel. D is the demand curve and S is the supply curve. Due to the fact that the trend shifts towards the budget hotel the demand will increase and the demand curve shifts to the right. As a result, the equilibrium price increases from P to P1, and the equilibrium quantity also increases.

(2).

If the government announces a subsidy then the firm will increase its production. As a result, the supply curve will shift to the right and the equilibrium price will fall. The equilibrium quantity will increase.

Graphical presentation:

According to the above figure, the x-axis measures the quantity of the hotel, and the y-axis measures the price of the hotel. D is the demand curve and S is the supply curve. Due to the announcement of subsidy, the supply curve will shift to the right from S to S1. As a result, the equilibrium quantity will increase but the price will fall.

(3).

If the government increases the tax by 2% then the company will decrease its supply due to the high cost of production. As a result, the supply curve will shift to the left and the equilibrium price will rise.

Graphical presentation:

According to the above figure, the x-axis measures the quantity of the hotel, and the y-axis measures the price of the hotel. D is the demand curve and S is the supply curve. Due to an increase in tax, the supply curve will shift to the left from S to S1. As a result, the equilibrium quantity falls and the equilibrium price rises.

(4).

The D (demand) curve is downward sloping because of its negative relationship with price and S (supply) will be upward sloping because of its positive relationship with price. When there will be a surge in household disposable income then the consumption expenditure of the household will rise and thereby the D curve will shift towards the right. The graphical presentation is demonstrated below:

Initially, the equilibrium is at point E1 when there will be a surge in household income then prices than the demand of the individuals will increase and D curve will shift from D to D1 and as a result prices rise