Question

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 table would be as below.

	Col I	Col II	Reason
a.	Equilibrium Price Increase	Equilibrium Quantity Increase	Demand Increases
b.	Equilibrium Price Decrease	Equilibrium Quantity Decrease	Demand Decreases
c.	Equilibrium Price Decrease	Equilibrium Quantity Increase	Supply Increases
d.	Equilibrium Price Decrease	Equilibrium Quantity Increase	Supply Increases
e.	Equilibrium Price Increase	Equilibrium Quantity Decrease	Supply Decreases
f.	Equilibrium Price Increase	Equilibrium Quantity Increase	Demand Increases
g.	Equilibrium Price Decrease	Equilibrium Quantity Increase	Supply Increases
h.	Equilibrium Price Decrease	Equilibrium Quantity Increase	Supply Increases
i.	Equilibrium Price Increase	Equilibrium Quantity Decrease	Supply Decreases
j.	Equilibrium Price Increase	Equilibrium Quantity Decrease	Supply Decreases

The increase in population increases the demand, as more quantity is demanded at the same price. The decrease in consumer income decreases the demand, since the income elasticity of demand is positive and income has decreased for the same prices as before. Part c and d both result to cheaper manufacturing cost, which increases supply as producers can now supply more than before at the same prices. A negative supply shock refers to sudden decrease in supply.

If consumer expects the footware price to rise, they would demand more currently to stock up, and the demand would increase. The increase in number of firms would mean that more can be supplied than before at the same price, which is basically the increase in supply. A reduction of tax on supplier would increase the supply, as they can provide more than before at the same price, with paying less tax. If subsidy are decreased, then producer would produce less than before since at the same price they can produce and provide less than before, and the supply would decrease. If manufacturers switch the product, this would mean that supply would decrease, since at the same price, less producers are providing the product in the market.

The change in demand and supply schedule is shown in graph below.

If demand increases, then equilibrium shifts from E to E1, where equilibrium price and quantity both increase. If demand decreases, then the equilibrium shifts from E to E2, where equilibrium price and quantity both decrease.

If supply increase, the equilibrium shifts from E to E1, where equilibrium price decreases, but equilibrium quantity increases. If supply decreases, the equilibrium shifts from E to E2, where equilibrium price increases but equilibrium quantity decreases.