Question

Use the following information about canoes to answer questions Both the Law of Demand and the Law of Supply apply to the market for canoes. The following is also true. Demand: (i) Canoes are an inferior good. (ii)Paddles are a complement to canoes. (iii) A bike is a substitute for a canoe. Supply: (i) Wood is an input to canoes. (ii) Canoes are made with hand sanders and handsaws. (1 pt for each part, 7 points total) A government regulation is removed decreasing the cost of wood. What will happen to each of the following in the canoe market? A) Demand for Canoes: B) Supply of Canoes: C) Price of Canoes: D) Quantity of Canoes: E) Total Expenditures on Canoes: F) Surplus to Canoe Consumers: G) Total Surplus in the Canoe Market:

Answer 1

When the government regulation is removed which decreases cost of wood:

(A) Demand will remain unchanged since demand side factor has not shifted.

(B) Supply of canoe will increases, since cost of production will decrease,

(C) Higher supply will shift supply curve rightward, decreasing price.

(D) Rightward shift in supply curve will increase quantity.

(E) Since price will all but quantity will rise, effect on total expenditure (= price x quantity) is indeterminate.

(F) Consumer surplus (= area between demand curve and market price) will increase.

(G) Total surplus will increase.