Question

1. (10 pts) The following questions deal with the market for footware (shoes).

In column I, answer with the following key:

A: equilibrium price increases

B: equilibrium price decreases

In column II, answer with the following key:

A: equilibrium quantity increases

B: equilibrium quantity decreases

Col. I Col. II

____ ____ a. The population increases.

____ _____ b. Consumer incomes decrease (footware are normal goods).

____ _____ c. A new technology makes it cheaper to manufacture footware.

____ ______ d. The price of leather falls (leather is an input into making footware).

____ ______ e. A negative supply shock hits the footware market.

___ ______ f. Consumers expect footware prices to rise in the future.

____ ______ g. The number of firms manufacturing footware increases.

____ ______ h. Taxes are reduced on footware manufacturers.

____ ______ i. Subsidies are decreased for footware manufacturers.

____ _____ j. Manufacturers find it more profitable to make clothing rather than footware.

Answer 1

The law of demand state that there is a negative relationship between price and quantity demanded. Thus, the demand curve is downward slopping. Apart from own price there are other factors which influence the demand curve, these factors are determinants of demand for instance change in the number of buyers/populations, increase in price of related goods, tastes and preferences. The law of supply states that there is a positive relationship between price and quantity demanded. Thus, the demand curve is upward slopping. Apart from own price there are other factors which influence the demand curve, these factors are determinants of demand for instance prices of the inputs, change in technology, government policies etc. population increases means increases in the demand. The demand curve shifts to the right. This increases the equilibrium price and equilibrium quantity. Col. I- equilibrium price increases Col. II Equilibrium quantity increases consumer income decreases mean the decrease in the demand. The demand curve shifts to the left. This decreases the equilibrium price and equilibrium quantity.

Col. I- equilibrium price decreases Col. II Equilibrium quantity decreases a new technology makes the manufacture of footwear. The supply curve shifts to the right. This decreases the equilibrium price and increases the equilibrium quantity. Col. I- equilibrium price decreases Col. II Equilibrium quantity increases d. the fall in the price of leather (input of the footwear) decreases the cost of production of footwear. The supply curve shifts to the right. This decreases the equilibrium price and increases the equilibrium quantity. Col. I- equilibrium price decreases Col. II Equilibrium quantity increases e. a negative supply shock decreases the production. The supply curve shifts to the left. This decreases the equilibrium price and increases the equilibrium quantity. Col. I- equilibrium price increases Col. II Equilibrium quantity decreases f.

consumer expect foot wares prices to rise in the future- The demand curve shifts to the right. This increases the equilibrium price and equilibrium quantity. Col. I- equilibrium price increases Col. II Equilibrium quantity increases the number of firms manufacturing footwear increase- The supply curve shifts to the right. This decreases the equilibrium price and increases the equilibrium quantity. Col. I- equilibrium price decreases Col. II Equilibrium quantity increases taxes are reduced on the footwear manufactures decrease the cost of production. The supply curve shifts to the right. This decreases the equilibrium price and increases the equilibrium quantity. Col. I- equilibrium price decreases Col. II Equilibrium quantity increases Subsidies are reduced for footwear manufactures- The supply curve shifts to the left. This decreases the equilibrium price and increases the equilibrium quantity.

Col. I-equilibrium price increases Col. II Equilibrium quantity decreases manufactures find it more profitable to make clothing rather than shoes- The supply curve shifts to the left. This decreases the equilibrium price and increases the equilibrium quantity. Col. I- equilibrium price increases Col. II Equilibrium quantity decreases