Chapter 3: #3, 6, 9, and 11

Chapter 3: #3:

a. Small automobiles become more fashionable: This should cause an increase in demand. On page 55 it states that a favorable change in consumer tastes (preferences for a product means more of it will be demanded at each price. Demand will increase and the demand curve will shift outward.

b. The price of large automobiles rises (with the price of small autos remaining the same): In this case there should be a decrease in demand shifting the demand curve to the left. Page 55

c. Income declines and small autos are an inferior good. This should cause an increase in demand because, an inferior good is a good (or service) whose consumption declines when income rises and rises when income decreases. Page 55.

d. Consumers anticipate that the price of small autos will greatly come down in the near future. This should cause demand to decrease (page 56) as they wait for the lower price.

e. The price of gasoline substantially drops. This should increase demand for gas and the smaller cars like the Mini Cooper or Smart cars. These two items may be considered complementary since cars use gasoline. So the demand should increase according to our text book (Page 56). This seems backwards to me. I thought the demand for smaller cars would decrease as gas prices drop, but maybe consumers would be expecting gas prices to increase and buy the smaller cars now in order to “beat” the anticipated price rise of both gas and the car. In this case the consumer would get a better deal on the small car verses when gas prices are high.

Chapter 3: #6:

a. A technological advance in the method of producing tires. Supply should increase because improvements in technology (techniques in production) enable firms to produce units of output with fewer resources (page 60). Because resources are costly, using fewer of them lowers production costs and increases supply.

b. A decline in the number of firms in the tire industry. Supply will decrease in the case. On page 60 of...