Homework 3 Answer Key section 1 Notes Correct answers highlighted in green explanation provided when deemed necessary Q1 Which of the following events could shift the supply curve of single family residential houses to the right An increase in the price of apartments which are a substitute for single family houses for many people looking for a place to live A newly formed expectation by house builders that prices of houses will be significantly higher 1 year from now A decrease in the price of lumber All of the above Explanation Lumber is an input in the production of single family houses If the price of an input decreases then the production of the output in this case single family houses is cheaper which means that producers of the output are willing to sell more of it at any given price thus pushing the supply curve to the right Q2 Which of the following events could cause a decrease or shift to the left in the supply of ceiling fans The number of sellers of ceiling fans decreases There is an increase in the price of air conditioners and consumers regard air conditioners and ceiling fans as substitutes There is a decrease in the price of the motor that powers ceiling fans All of the above Q3 At the equilibrium price the quantity of the good that buyers are willing and able to buy is greater than the quantity that sellers are willing and able to sell exactly equals the quantity that sellers are willing and able to sell is less than the quantity that sellers are willing and able to sell could either be greater or smaller than the quantity that sellers are willing and able to sell Q4 Which of the following events must cause equilibrium quantity to fall Demand increases and supply decreases Demand and supply both decrease Demand and supply both increase Demand decreases and supply increases Explanation The best way to understand this answer is to draw the supply and demand diagram that corresponds to each of the possible answers Blue corresponds to the initial supply and demand red corresponds to the new supply and demand Demand increases and supply decreases Demand and supply both decrease In this case the change in eq eq quantity is In this case equilibrium quantity ambiguous it increases if supply decreases by unambiguously falls little to S2 and decreases if supply decreases by a lot to S2 So this event may not cause equilibrium quantity to fall Demand and supply both increase Demand decreases and supply increases In this case equilibrium quantity Again we have ambiguity Eq quantity increases unambiguously falls if supply shifts a lot to S2 and decreases if supply shifts little to S2 Q5 Which of the following events must cause equilibrium price to fall Demand increases and supply decreases Demand and supply both decrease demand decreases and supply increases Demand and supply both increase Explanation Similar to that of question 3 Be careful though situations of ambiguity will be different from that case Q6 During the last few decades in the United States health officials have argued that eating too much beef might be harmful to human health As a result there has been a significant decrease in the amount of beef produced Which of the following best explains the decrease in production Beef producers concerned about the health of their customers decided to produce relatively less beef Government officials concerned about consumer health ordered beef producers to produce relatively less beef Individual consumers concerned about their own health decreased their demand for beef which lowered the equilibrium price of beef making it less attractive to produce Anti beef protesters have made it difficult for both buyers and sellers of beef to meet in the marketplace Q7 Which of the following events would unambiguously cause a decrease in the equilibrium price of cotton shirts an increase in the price of wool shirts and a decrease in the price of raw cotton a decrease in the price of wool shirts and a decrease in the price of raw cotton an increase in the price of wool shirts and an increase in the price of raw cotton a decrease in the price of wool shirts and an increase in the price of raw cotton Explanation wool shirts are a substitute in consumption of cotton shirts therefore a decrease in the price of wool shirts reduces the demand for cotton shirts shifts it to the left Raw cotton is an input in the production of cotton shirts and a decrease in its price increases the cotton shirt supply shifts it to the right As the graph below shows price unambiguously falls in this scenario You should graph out the other scenarios and verify that price does not necessarily fall Q8 What would happen to the equilibrium price and quantity of latt s if consumers incomes rise and latt s are a normal good Both the equilibrium price and quantity would increase Both the equilibrium price and quantity would decrease The equilibrium price would increase and the equilibrium quantity would decrease The equilibrium price would decrease and the equilibrium quantity would increase Explanation If latt s are a normal good and income rises then the demand for latt s will shifts to the right Graphing this scenario it is clear that both the equilibrium price and quantity increase Q9 What will happen to the equilibrium price and quantity of new cars if the price of gasoline rises the price of steel rises public transportation becomes cheaper and more comfortable and auto workers negotiate higher wages Price will fall and the effect on quantity is ambiguous Price will rise and the effect on quantity is ambiguous Quantity will fall and the effect on price is ambiguous Quantity will rise and the effect on price is ambiguous Explanation The increase in the price of steel and the wages or workers steel and work are inputs in the production of cars raises the cost of producing cars and shifts the supply curve to the left a decrease in supply Gas is a complement in consumption of cars and an increase in its price shifts the demand for cars to the left a decrease in demand Public transportation is a substitute in consumption and a decrease in its price makes transportation more attractive and cars less attractive thus shifting the demand for cars even further to the left As the figure below makes clear quantity will fall whereas the effect on price is ambiguous On the graph price falls but if demand decreased by less than the graph shows or supply decreased by more than the graph shows then price would go up instead Q10