Wakanda, a technology-driven country hidden from the rest of the world, uses its own currency Wakandan Dollar

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Question:

Wakanda, a technology-driven country hidden from the rest of the world, uses its own currency Wakandan Dollar (WKD). T’Challa, a young Wakan- dan Economist, tried to study the country’s Vibranium suit market and came up with the following insights: There are approximately 2,500 Vibranium suits available in the country. When the price of Vibranium suits is raised to WKD 3,000.00, it is hypothesized that individuals may not be willing to buy. However, when the price is decreased to WKD 0.00, all 2,500 Vibranium suits will be sold out. On the other hand, if the price of Vibranium suits is WKD 0.00, firms will not be willing to sell them because of certain losses. But if the price is set to WKD 1,000.00, then firms will be willing to sell all 2,500 Vibranium suits. As his assistant, you are asked by T’Challa to do an economic report by answering the following:

(a) Identify the supply and demand Equations for the Vibranium suit Market of Wakanda based on T’Challa’s insights.

(b) Graph the supply and demand curves. What would be the price and quantity sold in equilibrium? What can you say about the price elasticities of demand and supply from both curves? Which is one is more elastic? What happens when one is more elastic than the other?

(c) Steven Rogers, an Economic consultant, and T’Challa’s good buddy is considering a policy for a price ceiling for the Vibranium suits because he thinks they are overpriced at equilibrium. You know that the proposed price ceiling is lower by WKD 150.00 than the equilibrium wage. From this, calculate the new expected price and quantity sold after Steven’s proposed policy.

(d) Calculate the consumer surplus from (1) the original equilibrium, and (2) after the price ceiling implementation. Which one is larger and by how much?

(e) In reference to the original equilibrium, the firms could also innovate further to increase the production of Vibranium suits. How would this affect the supply and demand curves? How would the respective equilibrium levels of price and quantity change? Would you prefer firm innovation or a price ceiling to improve welfare? Briefly explain why this is your choice.

(f) In Wakanda, bread is a staple food which is sold at WKD 5.00. On the other hand, Vibranium suits, which is a luxury, are sold at a much higher price. This may be counterintuitive because a life necessity is sold cheaply while something inessential is priced more. Explain why.