solution

In 2007, the average price of renting a ship to carry raw materials from Brazil to China nearly tripled to $180,000 a day from $65,000 in the previous year (Robert Guy Matthews, “Ship Shortage Pushes Up Prices of Raw Materials,” Wall Street Journal, October 22, 2007, A1).

a. Use graphs to illustrate that this increase in the price of shipping is due to an increase in demand, particularly from the growing Chinese and Indian economies, and a fixed number of ships in the short run. In the long run, after an increase in the number of ships, shipping prices should drop.

b. For some goods, ocean shipping can be more expensive than the cargo itself: Iron ore costs about $60 a ton, but it costs about $88 a ton to transport it from Brazil to Asia. Higher shipping rates are expected to increase commodity prices according to weight, with transportation fees making up a larger percentage of the cost of heavier products like iron ore and grain. The trend may force manufacturers to pay more for the basic ingredients they need to make their products. And those higher costs could be passed on to consumers, affecting the price of everything from automobiles and washing machines to bread. What effect will this increase in shipping costs have on marginal costs and supply curves for various types of finished products (e.g., those that use heavier inputs or inputs that come from distant lands)?