Question

a(1). "Last year the United Auto Workers Union successfully negotiated a ten percent increase in the wages for its workers. This increase in the wage rate will cause an increase in the demand for automobiles, since many consumers now have greater incomes, but also a decrease in the supply of automobiles because the cost of production has increased.” Explain what is wrong with the statement. Provide a clear explanation in the box below.

b.(1).Marcia, says “Economists are silly. Clearly when the price of candy rises, I buy less candy, so my demand for candy will fall.” What mistake has Marcia made from an economist’s perspective?Provide a clear explanation in the box below.

c (3). Over the last 20 years the costs of raw tobacco have increased, and advertising campaigns have warned Americans about the dangers of smoking tobacco. More recently, the higher cigarette prices have led to an increase in the price of another potentially harmful activity, vaping. Use demand-supply analysis to explain what has happened in both the cigarette market and the vaping market. Provide a clear explanation in the box below.

Answer 1

a)theunited auto workers unioun increase the labour wage rate by 10% so the cost of the production increases and if the cost of the production increases tgen producers must have to hike the price of automobile to maintain the minimal profit level.now as the cost increases then the output level may be lower as it is not profitable as much as before and there can be a decrease in demand at the higher price.but there can be another effect like as the wage payment of the workers increase they can spend more now on comsumption goods which may cause a increase in aggregate demand of the economy so now the whole economy can go to boom periods where all the people had more money to spend than before.so they can demand more automobile also at a increasing price.so initially the production of automobile decreases due to increasing cost in short run but in long run the production will increase due to increase in demand.so if there is a increase in demand then there can't be decrease in production although production cost increases.

b)according to Marcia if the price of candy increases they she would consume less candy so her demand for candy will decrease but it is not true many times.always the demand doesn't decrease although price increases.but how it happen.if someone is addicted to candy then his demand for candy is inelastic as price increases but the quantity demanded is not decrease.

There is another one factor of price demand theory.demand is also depend how much portion of income engaged to consume that product which price has increased.if a consumer spend a little amount then it doesn't bother the consumer even if price of the product increases.the same thing happen for candy.as marie spend only a vrey small portion of her income to buy candy so although the price of candy increaes then the demad for candy is not decrease.

c)tobbaco is addective so individuals who smoke can't decrease its' consumption although price increases as their consumption is completely inelastic.and now cigarette and viping are substitute goods.so if the price of cigarettes increases but the price of viping is the same then the relative price of viping is decreases in respect of cigarettes.so some of the cigarettes consumers may thinks it is now more preferable to consume viping rather than cigarette as the price of viping is not increases in terms of cigarette.as we know if two goods are substitute to each other then the price increase of one goods without the others can incresae the consumption of second goods.the same thing happen to cigarettes and viping.as some smokers shifts from cigarette to viping.