Chapter 3 HW

State whether the following pairs of goods are complements or substitutes. a. Basketball courts and racquetball courts b. Squash racquets and tennis racquets c. Birthday cake and birthday candles d. Cloth diapers and disposable diapers

a. Subsititutes b. Substitutes c. Complements d. Substitutes Explanation Two goods are complements if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease in the price of one causes a rightward shift in the demand curve for the other). The opposite holds true if two goods are substitutes, where an increase in the price of one causes a rightward shift in the demand curve for the other (or a decrease in the price of one causes a leftward shift in the demand curve for the other). a. Basketball courts and racquetball courts are typically used in place of one another, so we would expect them to be substitutes. b. Squash racquets and tennis racquets are generally used in place of each other, so we would expect them to be substitutes. c. Birthday cake and birthday candles are typically used together, so we would expect them to be complements. d. Cloth diapers and disposable diapers are generally used in place of one another, so we would expect them to be substitutes.

How would each of the following affect the U.S. market supply curve for corn? a. The opportunity cost of farmers' time increases. The supply curve for corn would ____________ b. The price of farmland falls. The supply curve for corn would ___________ c. The government offers reduced farming subsidies. The supply curve for corn would _________ d. A tornado sweeps through Iowa. The supply curve for corn would _________

a. shift to the left b. shift to the right c. shift to the left d. shift to the left Explanation a. The supply curve for corn would shift to the left because higher opportunity costs would raise production costs. b. The supply curve for corn would shift to the right because a decrease in input prices would lower production costs. c. The supply curve for corn would shift to the left because reduced farming subsidies would make farming less profitable, leading some farmers to leave farming. d. The supply curve for corn would shift to the left. A tornado would destroy corn fields along with the infrastructure used to harvest and store it, so at every price, the quantity of corn supplied would be lower.

Indicate how you think each of the following would shift demand in the indicated market: a. The incomes of buyers in the market for new Honda Accords increases. The demand curve would __________. b. Buyers in the market for pizza read a study linking pepperoni consumption to improved health. The demand curve would __________. c. Buyers in the market for gas-powered cars learn of an increase in the price of electric cars (a substitute for gas-powered cars). The demand curve would _______. d. Buyers in the market for electric cars learn of an increase in the price of electric cars. The demand curve would __________.

a. shift to the right. b. shift to the right. c. shift to the right. d. remain unchanged. Explanation a. The demand curve would shift to the right. Since new cars are a normal good, an increase in income would increase the quantity demanded at every price. b. The demand curve would shift to the right. Buyers' preferences will probably change because most people want to consume foods that improve health. c. The demand curve would shift to the right. When the price of a substitute increases, the demand for a good increases. d. The demand curve would remain unchanged. An increase in the price of electric cars decreases the quantity demanded of electric cars, which causes movement along the demand curve.

Use the graphs provided to predict what will happen to the equilibrium price and quantity of oranges if the following events take place.Instructions: Depict how this event will affect the market of oranges by dragging the appropriate curve in the graph. a. A study finds that a daily glass of orange juice reduces the risk of heart disease. What will happen to the equilibrium price and quantity of oranges? b. The price of grapefruit falls drastically. What will happen to the equilibrium price and quantity of oranges? c. Suppose the wage paid to orange pickers rises. What will happen to the equilibrium price and quantity of oranges? d. Suppose exceptionally good weather provides a much bigger than expected orange harvest. What will happen to the equilibrium price and quantity of oranges?

a. supply remains unchanged, demand shifts right (up) Both equilibrium price and equilibrium quantity will increase. b. supply remains unchanged, demand shifts left (down) Both equilibrium price and equilibrium quantity will decrease. c. supply shifts left (up), demand remains unchanged Equilibrium price will increase and equilibrium quantity will decrease. d. supply shifts right (down), demand remains unchanged Equilibrium price will decrease and equilibrium quantity will increase. Explanation: a. The discovery will shift the demand curve for oranges to the right. As a result, both the equilibrium price and the equilibrium quantity of oranges will increase. b. Since grapefruit can be assumed to be a substitute for oranges for most consumers, a drastic decrease in the price of grapefruit will make some of the current orange consumers buy grapefruit instead. This will shift the demand curve of oranges to the left. As a result, both the equilibrium price and equilibrium quantity of oranges will decrease. c. Since labor is an input to orange production, an increase in the wage is an increase in the cost of an input. This will shift the supply curve of oranges to the left. As a result, the equilibrium price of oranges will increase and the equilibrium quantity will decrease. Note that an increase in wages does not automatically mean an increase in the productivity of the workers, which would have affected supply in the opposite direction. d. A better than expected harvest means that supply will be greater, shown graphically as a shift of the supply curve to the right. As result, the equilibrium price of oranges will decrease and the equilibrium quantity of oranges will increase.

In March 2020, global crude oil prices tumbled from over $50 a barrel to below $23 per barrel, bringing prices to their lowest level in nearly two decades. This precipitous drop in crude oil prices was fueled by two major shocks to the oil market. First, the COVID-19 pandemic led to a massive reduction in all forms of travel as large numbers of people around the world were advised to shelter in place. Second, Russia, Saudi Arabia, and a number of other major oil-producing nations typically reach collective agreements to limit the world supply of oil in order to keep prices high, but these negotiations broke down in March of 2020, prompting a sharp increase in oil production. Using a supply and demand graph, show how each of these factors affected the market price and quantity of crude oil. Instructions: Click on and drag one or both of the lines below to depict the changes in supply and/or demand in the crude oil market.

supply shifts right (down), demand shifts left (down) Explanation The abrupt reduction in travel during the COVID-19 pandemic led to a sharp decrease (leftward shift) in the demand for crude oil since it is a primary ingredient in the production of gasoline and jet fuel. At the same time, the increase in the production of crude oil lead to an increase (rightward shift) in supply. Both the decrease in demand and the increase in supply worked to lower the equilibrium price of crude oil. The net effect on the equilibrium quantity, however, depends on the relative magnitude of the shifts in supply and demand. In theis case, the demand shift dominates, so the equilbrium quantity falls. If the supply shift had dominated, equilibrium quantity would have increased.