Question

In: Economics

You are the manager of Canadian operations for a smartphone manufacturer. Until recently, the market for...

You are the manager of Canadian operations for a smartphone manufacturer. Until recently, the market for smartphones was in equilibrium. Over the last month, your company has increased advertising expenditures in Canada. They've also decreased the price of all phone accessories by 10%. Meanwhile, microchip prices have increased by 3%. Which of the following answers best explains how you expect the market for smartphones will be impacted by these new developments?

a. Supply and demand increase. As a result, the equilibrium quantity of smartphones increases.

b. Supply and demand increase. As a result, the equilibrium quantity of smartphones decreases.

c. Supply increases and demand decreases. As a result, the equilibrium price for smartphones increases.

d. Supply increases and demand decreases. As a result, the equilibrium price for smartphones decreases.

e. Supply decreases and demand increases. As a result, the equilibrium quantity of smartphones increases.

f. Supply decreases and demand increases. As a result, the equilibrium price for smartphones increases.

g. Supply and demand decrease. As a result, the equilibrium quantity of smartphones increases.

h. Supply and demand decrease. As a result, the equilibrium quantity of smartphones decreases.

Solutions

Expert Solution

The price of phone accessories has decreased.

Phone accessories and smartphone are complement.

A decrease in price of complement results in an increase in demand for the given good.

Secondly, increased advertising expenditures will also boost the demand for smartphones.

So, decrease in price of complement coupled with increased advertising will result in an increase in demand for smartphones.

The price of microchip has increased.

Microchip are used as raw material in manufacturing of the smartphones.

As price of microchip will increase, the cost of producing smartphones will increase.

This increase in cost of producing smartphones will reduce the profit margin of firm and would compel it to reduce production.

As production will decreas, the supply of smartphones will decrease.

When demand increases and supply decreases, there is definite increase in equilibrium price.

However, impact on equilibrium quantity depends on the magnitude of change in demand and supply.

This is not provided. So, impact on equilibrium quantity is uncertain.

Hence, the correct answer is the option (f) [Supply decreases and demand increases. As a result, the equilibrium price for smartphones increases].


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