Question

QUESTION 21 A newspaper story recently reported that the price of new cars has decreased and the quantity of new cars sold has dropped. A possible cause of these changes is:

A.Increase in income

B.Decrease in production costs

C.An increase in the price of gasoline

D.An increase in the cost of metals used to build cars.

QUESTION 22 Suppose the price of oranges rises. Then we would expect the supply of oranges to:

A.Shift right

B.Shift left

C.Increase either way

D.Stay the same

QUESTION 23 Suppose you observe the price of new cars falling while the quantity of new cars increased. This can be explained by

A change in supply due to lower production costs

A change in demand due to higher incomes

A change in demand due to decreased preferences for cars over trucks

A change in demand due to falling incomes

Answer 1

Hi student,

I have answered your questions. Please let me know if you have any queries in the comments.

QUESTION 21 –

A newspaper story recently reported that the price of new cars has decreased and the quantity of new cars sold has dropped.

Answer – If there is an increase in income, then the demand curve would shift to the right, without any change in supply because people would demand more new cars. As a result, the equilibrium price and quantity of new cars increases.

If there is decrease in production costs, the producers would supply more new cars because they can produce more at the same cost and the supply curve would shift right. There would be no change in demand. As a result, equilibrium price decreases and equilibrium quantity increases.

If there is an increase in the cost of metals used to build cars, then the cost of production increases and the supply curve shifts to the left with no change in demand. Then the equilibrium price increases and equilibrium quantity decreases.

But if there is an increase in the price of gasoline, then the demand for new cars would decrease because gasoline and cars are complementary goods and the demand curve for new cars would shift to the left. As a result, the equilibrium price of new cars would decrease and the equilibrium quantity of new cars sold will drop.

So, option C is the correct answer.

QUESTION 22 Suppose the price of oranges rises. Then we would expect the supply of oranges to:

Answer – If the price of orange rises, then we would expect the supply of oranges to stay the same (Option D). This can be derived from the upward sloping supply curve that as price of oranges increases, the quantity supplied would increase. So, movement would occur along the supply curve. There would be no shift in the supply curve.

QUESTION 23 Suppose you observe the price of new cars falling while the quantity of new cars increased. This can be explained by

Answer – As I have discussed in Question 21, that the price of new cars would fall while the quantity of new cars would increase when there is a decrease in production cost. The producers can produce the same quantity at a reduced price and so their supply to the market increases. The supply curve would shift to the right without any shift the demand curve and the resultant effect would be that the equilibrium price increases and equilibrium quantity decreases.

So, Option A is the correct answer.

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