Question

In: Economics

Steel is the main input in the production of cars. A decrease in the price of...

  1. Steel is the main input in the production of cars. A decrease in the price of steel will shift.

  1. Supply curve of cars to the right
  2. Demand curve of cars to the right
  3. Supply curve of cars to the left
  4. Demand curve of cars to the left
  1. An increase in the price of a substitute good will shift the

  1. Supply curve to the left
  2. Supply curve to the right
  3. Demand curve to the right
  4. Demand curve to the left
  1. Two goods are substitutes if a decrease in the price of one--an increase in demand for the other

TRUE / FALSE

  1. When the income elasticity of demand is negative then goods are complements.

TRUE / FALSE

  1. When quantity demanded is lower than quantity supplied, then

  1. Price continue to fall until market reaches the equilibrium
  2. The supply curve will shift to the right
  3. Prices will be unaffected
  4. Prices continue to rise until market reaches the equilibrium

Solutions

Expert Solution

Answer 1

Steel is the main input in the production of cars. A decrease in the price of steel will shift.

Option A) is correct. Supply curve of cars to the right.

Reason: A decrease in the price of a raw material leads to higher production because it is now cheaper to produce that good. Thus, the supply curve will shift to the right.

Answer 2

An increase in the price of a substitute good will shift the

Option c) is correct. Demand curve to the right.

Reason: An increase in price of a substitute good leads to increase in demand for the other substitute. Thus, when demand increases, the demand curve will shift to the right.

Answer 3

Two goods are substitutes if a decrease in the price of one leads to an increase in demand for the other

FALSE

Reason: If a decrease in price of one good is leading to an increase in demand of another good, they are said to be compliments and not substitutes.

Answer 4

When the income elasticity of demand is negative then goods are complements.

FALSE

Reason: It is the Cross Price of elaticity of demand that is used to determine whether goods are substitutes or compliments. Income elasticity shows whether goods are inferior, luxury, necessity etc.

Answer 5

When quantity demanded is lower than quantity supplied, then

Option a) is correct. Price continue to fall until market reaches the equilibrium

Reason: Since quanity demanded is lower than quantity supplied, there is a surplus in the market. This will result in decrease in prices to obtain a new equilibrium and lower prices.

Rahul Sunny answered 1 month ago
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