Chapter 2-1
Specialization increases productivity because it increases knowledge.
If people can’t trade for other goods, they won’t specialize in producing just one good. Thus, trade is necessary if people are to benefit from specialization.
Usain Bolt has a comparative advantage in running, but Harry has a comparative advantage in mowing Usain’s lawn because Harry faces a much lower opportunity cost in mowing lawns than Usain Bolt does.
Chapter 3-1
A rise in the income of Indian workers will lead to an increase in the demand for automobiles. At first as income rises, workers may demand more charcoal bricks for heating, but charcoal bricks are a dangerous and unpleasant way to heat a home so as income increases beyond a certain level, workers will demand fewer charcoal bricks. Thus, a good can be a normal good over some levels of income and an inferior good over other (usually higher) levels of income.
As the price of oil rises, some people will substitute mopeds for auto mobiles so the demand for mopeds will increase.
B-2
Chapter 3-2
Improvements in chip-making technology have driven down the costs of this input so the supply of computers increases, meaning that the supply curve for computers shifts to the right and down.
The ethanol subsidy lowers the cost of producing ethanol, therefore increasing the supply of ethanol (the supply curve for ethanol shifts to the right and down).
Chapter 4-1
If the demand for large trucks and SUVs falls unexpectedly, auto companies will find that at the current price they have a surplus of trucks and SUVs. The quantity supplied is greater than the quantity demanded, so they will lower prices in order to sell already manufactured trucks and SUVs.
Sellers have produced too many clothes if they have them available at outlet malls where price discounts are the norm. Sellers are cutting their prices to reduce the surplus and move the clothes out the door.
Chapter 4-2
As the price of cars goes up, the least-valued wants will be the first to stop being satisfied. For example, parents may be more reluctant to buy their teenage sons and daughters a new automobile.
If telecommunication firms overinvest in fiber-optic cable, for example, they will have to lower the price of using fiber-optic lines. For example, a company such as Verizon will offer fiber-optic Internet and phone connections at discount prices. The ensuing losses from price cutting will dampen future investment in fiber-optic cable. More generally, firms invest in order to make a profit. If firms overinvest, they will take losses, which give them an incentive to invest carefully.
Kiran values the good at $50, and in a free market will buy it from store B for $35, earning a total consumer surplus of $15 ($50 – $35). If store B is prevented from selling, say by a regulation or a tax, then Kiran will buy from store A for $45, but total consumer surplus will fall to $5 ($50 – $45).
Chapter 4-3
If flooding destroys some of the corn and soybean crops, these crops will have a decrease in supply. This decrease in supply will lower the equilibrium quantity and increase the equilibrium price.
If resveratrol (from Japanese knotweed) increases life expectancy in fish, people might think it will have the same effect in humans, and so more people will demand it, increasing demand. This will increase the price of Japanese knotweed and lead to an increase in the quantity grown.
B-3
The demand for hybrid cars will increase as the price of gas increases, that is, the demand curve shifts to the right/up. We show this in Figure 4.7: Think of the New demand as the demand for hybrids when the price of gas is high, and the Old demand as the demand for hybrids when the price of gas is low. The price of hybrids will rise with an increase in demand, especially in the short run.
Chapter 4-4
The price of oil rose in 1991 primarily because of a supply shock, the Persian Gulf War. (It would also be okay to label this as a demand shock because the demand for oil increased when people expected that the war would reduce the future supply of oil.) Bonus points if you recognized both possibilities.
From 1981 to 1986, the price of oil fell steadily. The higher price in the preceding years encouraged exploration, which several years later led to increased supply, especially from non-OPEC sources.