Q2. Using general equilibrium analys... [FREE SOLUTION]

Chapter 16: Q2. (page 642)

Using general equilibrium analysis, and taking into account feedback effects, analyze the following:
a. The likely effects of outbreaks of disease on chicken farms on the markets for chicken and pork.
b. The effects of increased taxes on airline tickets on travel to major tourist destinations such as Florida and California and on the hotel rooms in those destinations.

Short Answer

Expert verified

The outbreak will reduce the demand for chicken and will increase the demand for pork. However, the feedback effect will reduce the fall in demand for chicken and its prices.
A tax on airline tickets will increase the price of airline tickets and reduce the demand for travel and hotel rooms. However, the feedback effect will reduce the fall in demand for travel and hotel rooms.

Step by step solution

Step 1. Feedback effects on chicken and pork

People worrying about the outbreak of disease on a chicken farm will reduce chicken consumption, and consequently, the demand for chicken will go down. This will increase the demand for pork since people will shift their consumption from chicken to pork. Given the demand and supply conditions, chicken prices will decrease, and the price of pork will increase.

Still, certain consumers may buy the chicken due to reduced prices of chicken and increased prices of pork. Following the feedback effect, increased consumption by certain people will offset the overall reduction in the demand for chicken and the price of chicken.

Step 2. Feedback effect of airline tickets and hotel rooms

A tax increases the prices of the commodity; given this, a tax on airline tickets will increase the prices of travel for people, and the demand for tickets will go down. Following high ticket prices, the demand for hotel rooms will reduce since there will be less flow of travelers.

Following the feedback effect, the reduced prices of hotel rooms will encourage some people to travel, which will offset the reduction in demand for travel.