solution

Braeburn Publishing decides to try to cut its costs of printing books by cutting the price that it offers to companies that supply it with paper.

a. Suppose that the supply is perfectly price inelastic (at least in the short run), because Braeburn buys the entire output of the Morales Paper Company. Because it has no other customers (for now), Morales has no choice but to sell to Braeburn. Illustrate on a graph what will happen to the quantity that Braeburn buys, the price that it pays, and the amount that it will spend on paper when it offers a lower price for paper.

b. Suppose, instead, that the supply of paper is very (but not perfectly) price elastic, because all the companies that sell paper to Braeburn can easily sell their paper elsewhere. Illustrate on a graph what will happen to the quantity that Braeburn will be able to buy, the price that it will pay, and the amount that it will spend on paper, if it follows through with its plan to offer a lower price.