In the competitive market for welding services in Logan, assume that a > 0 and b > 0 are exogenous variables: a represents the price of a related good, and b represents the number of welders (i.e., sellers) in the market. Q represents hours of welding services, and P represents a welders hourly wage. Assume that the demand for welding services is QD(P) = a - (P/2) and the supply is QS(P) = (b*(P- 2)) /20
(a) Which of the following possibilities makes sense, for the related good? Brie y justify your answers. i The related good is a substitute for welding. ii The related good is a complement for welding. 1 iii Welding is an input in the manufacture of the related good. iv The related good is something used in the process of welding. The baseline case in this market is: a=34 and b=100.
(b) Draw the supply and demand curves in the baseline case, including the exact coordi- nates of two points on each curve.
(c) Starting from the baseline case, suppose that the price of the related good falls to a = 23, and the market reaches equilibrium. On the same diagram draw (i) the new supply and demand curves, including the exact coordinates of two points on each curve. (ii) Calcu- late price and quantity in the new equilibrium.
(d) Starting from the baseline case, suppose that the number of welders in the market rises to b = 122, and the market reaches equilibrium. On a new diagram draw (i) the new supply and demand curves, including the exact coordinates of two points on each curve. (ii) Calculate price and quantity in the new equilibrium.
(e) Describe an economically reasonable model in which a would rise. Describe, alterna- tively, an economically reasonable model in which a would fall.
(f) Starting from the baseline case, what happens to the equilibrium quantity of welding services if the equilibrium price rises to 10?
(g) Starting from the baseline case, assume that a falls to a=19, but assume also that the number of welders b adjusts until the equilibrium wage is unchanged. (i) In this problem, what is exogenous and what is endogenous? (ii) What is the new number of welders? (iii) What has happened to the equilibrium quantity of welding services, per welder? Is it higher or lower than in the baseline case? (iv) Can you provide an intuitive explanation for your answer to (iii)? (Think about the individual welders supply decision.)
(h) Starting from the baseline case, suppose that a changes as in part (c) and b changes in part (d), simultaneously. Calculate price and quantity in the new equilibrium. Is there any reasonable sense in which one can say that the supply shift dominates the demand shift, or the demand shift dominates the supply shift?