Equilibrium question?

Assume that the market for roses is in equilibrium, and that carnations are a close substitue. One day, a disease strikes the carnations, though the roses remain unharmed.





a. Determine what will happen to the price and quanity in the carnation market as a result of the carnation disease.


b. Determine what will happen to price and quantity in the rose market as a result of the carnation disease.


c. Suppose the government places an effective price ceiling on roses. Using a supply/demand diagram, illustrate the result in price and quantity for the roses.

Equilibrium question?
Sounds like homework...think it out.
Reply:Well, I'm no economist, but here goes.





a) The price would go up for carnations as there would be a limited supply of healthy carnations, thus the price would rise. Low supply, same demand, high price.





b) Again, not an economist here, but because the carnation is the substitute for the rose, I don't believe anything would change for the rose at all. Supply of roses is the same, demand is the same, so I don't think anything would change for the roses.





c)A price ceiling might get the suppliers of the rose to not want to have a large supply of them, so the quantity of the roses on the market would go down somewhat, which would cause the price to rise, and thus, the roses would leave the equilibrium they were in.
Reply:a. How the disease effects the quantity of carnations is a biolgy question, not economics. I think we are supposed to assume the disease means fewer are produced or that the costs to produce increase. Either way, the disease is likely to cause the price of carnations to increase.


b. Since roses are a suitable substitute for carnations, the demand for roses will increase with higher carnation prices, initially increasing the price for roses as well, but also likely to lead to an increase in rose production (unless the carnation disease is a one time occurance- how the f**k are we supposed to know what the disease is and how it affects carnations?)


c. The price ceilling, if set below market prices, will increase demand for roses. If the price ceiling is below market price for carnations and carnations do not have a similar ceiling, demand for carnations will decrease and demand for roses will increase. If the price ceiling is set below cost, supply will decrease and a black market will develop for roses. If the price ceiling is below market, but above cost, production will increase to meet the demand, but only the low cost suppliers will be able to afford to expand, creating consolidation in the market.

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