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Producers were accused of price gouging as the price of bottled water soared after Hurricane Andrew. Consumers clamored for price controls to keep...
1. Producers were accused of price gouging as the price of bottled water soared after Hurricane Andrew. Consumers clamored for price controls to keep bottled water at pre-Andrew levels. Use supply and demand analysis to graphically show the effect of setting a price ceiling on bottled water after Hurricane Andrew at the pre-hurricane equilibrium price. Use your graph to assist in explaining the likely unintended effects of such a price control. Be sure that your graph is completely and correctly labeled.
2. The cross elasticity between two goods has been measured at −1.2. How are the goods related? Explain. Give an example of goods for which this might be a reasonable measure of cross elasticity. Using a S & D model for each of the two goods in the example you gave, show how the change in the price of one good (an increase in Supply changes the price of the first good), will affect the market for the related good or second good.