# ec-6 - E201 Spring 2009 Homework #3 ANSWERS One must learn...

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E201 Spring 2009 Homework #3 ANSWERS One must learn by doing the thing; for though you think you know it, you have no certainty until you try. (Sophocles) After re -reading Chapter 4 in Mankiw, answer the following: 1. Explain why there is usually a direct relationship between quantity supplied and price. 2. List the shift variables of supply. Cost conditions, availability, expectations and number of sellers. 3. a. Show an increase in supply on a graph. b. Show a decrease in supply on a graph. a. P S b. P S’ S S Q Q 4. Using a separate graph for each, show the effects of the following on the supply of autos : a. Decrease in the price of steel A decrease in input prices increases supply, figure 3a. b. Increase in wages of auto workers An increase in input prices decreases supply, figure 3b. c. A foreign automaker enters the domestic market An increase in the number of sellers increases supply, figure 3a. d. Government mandates that automakers install catalytic converters to reduce auto emissions Increases in the cost of making an auto decreases supply, figure 3b. 5. a. Draw a graph of a market for gasoline with an equilibrium price of \$1.95 a gallon. Note: a market requires both a supply schedule and a demand schedule. P S \$1.95 D Q

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b. On a separate graph for each, show the effects of each of the following on price and quantity exchanged: (1) Increase in demand (Price increases, Quantity increases) P S P \$1.95 D D Q’ Q (2) Decrease in demand (Price Decreases, quantity decreases) P S \$1.95 P D D Q’ Q (3) Increase in supply (Price decreases, quantity increases) P S S \$1.95 P D Q’ Q (4) Decrease in supply (Price increases, quantity decreases)
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## ec-6 - E201 Spring 2009 Homework #3 ANSWERS One must learn...

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