Question

Chapter 4 In 2018, North Carolina is being hit with a hurricane and cotton production has stopped. Analyze the effect on the world market for cotton, the U.S. market for cotton, the U.S. market for shirts and the U.S. market for polyester shirts. 1) Draw and label supply and demand diagram (market, axes, curves), 2) Identify reason for shift of any curve from list of non-price factors in supply or demand function 3) State whether equilibrium price and quantity increase or decrease 3.)

Answer 1

Answer: As North Carolina is being hit with a hurricane and as cotton production has stopped, hence the supply of cotton in world market will decline as North Carolina was an exporter of cotton to the world market, and the supply curve will shift leftward from S1 to S2 and as the economy moves from point A to point B hence the equilibrium price of cotton will increase from P1 to P2 and the equilibrium quantity of cotton will decline from Q1 to Q2.(Panel A)

Now as North Carolina is a U.S state, due to the occurrence of the hurricane, the supply of cotton in the U.S market will fall and the supply curve will shift leftward from S1 to S2 and as the economy moves from point A to point B, the equilibrium price of cotton in the U.S market will increase from P1 to P2 and the equilibrium quantity of cotton in the U.S market will decline from Q1 to Q2. (Panel B)

Now as cotton is an input to produce Shirts in the U.S market, due to the occurrence of hurricane, the cost of producing shirts will increase and the supply curve of Shirts in the U.S market will shift leftward from S1 to S2 and as the economy moves from point A to point B, the equilibrium price of US Shirts will increase from P1 to P2 and the equilibrium quantity of U.S Shirts will decline from Q1 to Q2. (Panel C)

As cotton shirts and polyester shirts are substitutes of each other, due to the occurrence of hurricane, as the supply of cotton price falls and the price of cotton shirt increases, people will switch to polyester shirt and the demand for polyester shirt will increase and the demand curve for polyester will increase from D1 to D2 and as the economy moves from point A to point B, the equilibrium price of polyester shirt increases from P1 to P2 and the equilibrium quantity of polyester shirt increases from Q1 to Q2. (Panel D)

Parel A Puel B S1 . A QE QIQ Parel C Puel D Q1 Q2 Scanned with CamScanner