Question

In Problem Set 1, question 1d solutions do agree with me that the supply curve shifts to the right in the Chinese textile market. However, I do not agree that the equilibrium price will be higher. How can this be (considering the intersection point will always be lower in terms of y-value)?

Answer 1

In 1d - Mexican Workers go on Strike
-> Cost of Production of textile in Mexico Increases
-> therefore, It's supply decreases (Shifts to the left) & price Increases.
-> Therefore, Mexican Textiles demand decreases.
-> as China Textiles Products are MT's substitutes, CT's demand Increases. (Shifts to right)
-> As a result, Equilibrium price of Chinese Textiles Increases.