Economics 11

Spring 2005

Due Friday February 11, 2005

Homework 3

Chapter 4 Problems and Applications

Do problems 1, 2 , 6, 12

1.a. This is caused by a leftward shift in the supply curve, raising price and reducing quantity. The supply curve shifts from S1 to S2

b. There is a decrease in demand for Caribbean hotel rooms, reducing the price.

c. Gasoline and used Cadillacs (gas guzzlers) are complements. When the price of gas goes up, he demand for used gas guzzlers falls, so the price of used Cadillacs falls. This graph looks just like part b for Cadillacs and part a for oil.

2. An increase in the demand for notebooks is a rightward shift of the demand curve, from D1 to D2. The quantity of notebooks demanded rises, but so too does the quantity supplied. So the statement is false. The quantity demanded and supplied rises from just over 2 to just over 4.

6. If births are high in 2005, there will be an increase in demand for baby sitting services in 2010 , as there are more parents with young children who want to get out of the house. Therefore, the hourly wage of baby sitters will increase. By 2020, the new babies will be 15 years old, and there will be lots of baby sitters available. So the supply curve has shifted out and wages for baby sitters will be depressed.

12. If champagne prices were high as a result of a marketing campaign, that must have been caused by an increase in demand. The increase in demand led to an increase in quantity demanded. The new price is an equilibrium , or market clearing, price. Demand does not fall due to a price rise; the price rise was caused by the demand increase. The higher price has already been accounted for in the quantity demanded. If price hadn’t changed and demand increased, there would be even more people drinking champagne.