Price S 2 S 1. Q 2 Q 1 Quantity D 2

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1 CHAPTER 3 Answers to select problems: 2. a. Since denim is a major input into the production of jeans, an increase in the price of denim would lead to a leftward shift of the supply curve, which would result in a higher equilibrium price, and a lower equilibrium quantity. b. Assuming jeans are a normal good (this seems a plausible assumption), a decline in income would result in a decrease in demand; equilibrium price and quantity both decrease.

2 4. a. b. The equilibrium price is $200, and the equilibrium quantity is 450 scooters. c. As shown in part a, the supply curve would shift leftward, for example from to. The equilibrium price would rise and the equilibrium quantity would fall. d. The supply curve would shift leftward, while the demand curve would shift rightward. The price per scooter would increase, but the effect on equilibrium quantity would depend on the relative sizes of the shifts. 6. The mistake is in the assumption that a higher price will lead to a rightward shift in supply. Instead, we know that an increase in price of oranges (caused by the rightward shift in demand) will only cause a movement up along the supply curve, without shifting the supply curve. This will result in a higher equilibrium price and a larger equilibrium quantity traded.

3 8. a. Coffee supply declines from to. Equilibrium price increases from to ; equilibrium quantity declines from Q 1 to Q 2. b. Since the price of a substitute has fallen, demand for coffee should decrease. Demand decreases from to. Equilibrium price and quantity decline from, Q 1 to, Q 2. c. An increase in wages of coffee workers should result in a decrease in supply. Supply decreases from to ; equilibrium price increases from to and quantity declines from Q 1 to Q 2.

4 d. This announcement would undoubtedly cause a decrease in demand, from to, resulting in a lower equilibrium price and quantity. e. If consumers expect higher coffee prices in the future, they would try to stock up on coffee now, causing an increase in current demand. If producers, too, expect the price to rise, they may withhold coffee, waiting to sell it at higher prices later. This will cause a decrease in supply. The combined effect of the shifts in supply and demand is a rise in equilibrium price. The equilibrium quantity, however, could rise or fall, depending on which shift is greater. Quantity

5 10. a. The equilibrium price and equilibrium quantity both rise. b. The equilibrium price and equilibrium quantity both fall. c. The equilibrium price and equilibrium quantity both rise.

6 d. The equilibrium price falls and the equilibrium quantity rises. e. The equilibrium price rises and the equilibrium quantity falls. 12. There was a rise in the expected price. Even thought the price of cotton was high, cotton farmers must have expected it to go even higher, so they wanted to wait to sell. In fact, an expectation that prices will be higher in the future can cause the price to be high in the present, because high expected future prices shift the supply curve leftward, causing the current pricd to rise.

7 As people move to Manhattan due to its lower crime rate, the demand for rental housing in Manhattan increases, leading to higher rents in Manhattan. People who can no longer afford Manhattan rents move to other neighborhoods in the New York area (housing in other neighborhoods being a substitute for housing in Manhattan). This shifts the demand curve for rental housing in these other neighborhoods to the right, driving up rents in these areas and making their original residents worse off. Apartments inmanhattan Apartments in Other Neighborhoods