There are 2 brands of cell phones that are almost identical except for some minor features: the A-Phone and the Pomegranate.
Part I
Draw the demand curve for the A-Phone. Explain how the graph, price, and quantity demanded will change if the following occurs:
• There is an overall increase in income.
• There is an overall increase in income and people believe that the Pomegranate is now better than the A-Phone.
• The price of the A-Phone goes up when a flaw is found in the Pomegranate.
• A new type of walkie-talkie has an unlimited range and is basically free.
• It is discovered that there are health concerns when using cell phones.
• There is a baby boom.
• The price of the A-Phone and the Pomegranate both go up.
What happens to the supply of cell phones if the market price goes up?
Part II
Explain what happens to the price and quantity supplied and how it reflects on a graph if the following occurs:
• It becomes more expensive to produce cell phones.
• More cell phones are being produced with the same amount of inputs.
• Walkie talkies are popular because of the new technological change mentioned above.
• Another company starts producing cell phones, and now there are 3 producers in the market.
• People think the price of cell phones will go up in the future.
Part III
Draw a graph which shows the equilibrium price of cell phones. Explain what the graph is showing.
When the new manufacturer introduces the Robo cell phone to the market, how does that effect the equilibrium price if the Robo is basically the same as the other cell phones?
Part IV
As the public’s dependence on cell phones continues to grow, the cost of the phones may be decreasing, but the stronghold that telecommunication companies have on the public in regards to contracts and climbing fees is alarming.
Additionally, all cell phone companies charge about the same prices, and the consumers do not have much choice in substituting providers. Consumers appear to need some controls in this regard, and the government decides to step in.
• What is the effect of government intervention in the cell phone market? Make sure that you use graphs to illustrate your point.
• Is this a good thing for consumers?
On the other hand, the government sees the increase in cell phone use as an opportunity to make some additional revenue, and it decides to tax service providers.
• Who is really paying the tax?
• Illustrate your conclusion on a graph.
• Do you think that there is a free market for cell phone users? Why or why not?