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Unformatted text preview: P ART T WO Answers to Problems in Text 1 1 This section provides answers to problems not already solved in the text. Chapter 2 ¡ Answers to Problems in the Text 1. When Japan discovered the StarLink, demand for U.S. corn fell. As a result the supply of corn to the U.S. market increased. Figure 2.1 shows a rightward shift of the supply curve from S to S 1 in the domestic market, which caused the price to fall from P to P 1 . Figure 2 . 1 2. In the short run, the demand curve for newspaper advertising will shift to the left. Over time, the supply of newspaper advertising may decrease if marginally profitable newspapers are driven from the market by the reduced profits that result from lower advertising prices. 3. When the ban on legal imports went into effect, the demand for imports to the US fell to zero. Given that the U.S. represents 80% of the market, it would cause a dramatic drop in prices. If the drop in prices made caviar harvesting unprofitable, and fisherman turned to other activities, it would help the fish population. If a black market developed, demand would not fall to zero, and caviar harvesting may continue at a reduced level. If exporters simply shipped the caviar to other countries, but at lower prices, it could make problems with the sturgeon population even worse as exporters increase output to maintain income levels. 4. If the orange juice supply curve is made up of the supply curves of U.S. and Brazilian firms, the damage to the U.S. oranges would shift the market supply curve to the left. Prices would increase, U.S. firms would sell less, and Brazilian firms would sell more juice at the new higher prices. 166 Part 2 Answers to Problems in Text 6. See Figure 2.2. The increased foreign demand shifts the demand curve from D 1 to D 2 , resulting a higher price and higher quantity. Figure 2 . 2 7. The increased outsourcing in India caused the demand curve shifts to the right, resulting in a higher wage rate as shown in Figure 2.3. In the long run, supply of skilled workers may increase, shifting the supply curve to the right as well. The net impact will depend on the relative magnitudes of rightward shifting of either curve. Figure 2 . 3 Chapter 2 167 8. After the quota was reimposed, the equilibrium price would increase and quantity decrease as shown in Figure 2.4 below. Figure 2 . 4 9. The resulting equilibrium prices depend on the magnitude by which the demand and supply curves shift to the right. If the supply curve shifts rightward by a higher magnitude than does the demand curve, the equilibrium price might be higher. 12. The quota causes the supply curve to become vertical at the quota output level. Below that level, the supply curve is unaffected. If the demand curve intersects the supply curve at an output level less than the quota, the equilibrium is unaffected. If the quota binds, equilibrium output is the quota value and price is determined by where the demand curve crosses the vertical portion of the supply curve. ...
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