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Explain the effect on equilibrium price when price of inputs increases. OR The market for cars is in equilibrium. Suppose the price of almunium parts (used in cars) increases. Explain the effect of rise the price of aluminimum parts on the equilibrium price and quantity of cars. (Use diagram)

Answer» <html><body><p></p>Solution :When price of inputs increase, <a href="https://interviewquestions.tuteehub.com/tag/assuming-1986865" style="font-weight:bold;" target="_blank" title="Click to know more about ASSUMING">ASSUMING</a> no change in other <a href="https://interviewquestions.tuteehub.com/tag/factors-458933" style="font-weight:bold;" target="_blank" title="Click to know more about FACTORS">FACTORS</a>, then the cost of production rises. As a result, supply decreases due to fall in the <a href="https://interviewquestions.tuteehub.com/tag/profitability-1168698" style="font-weight:bold;" target="_blank" title="Click to know more about PROFITABILITY">PROFITABILITY</a> level. It will lead to <a href="https://interviewquestions.tuteehub.com/tag/excess-978535" style="font-weight:bold;" target="_blank" title="Click to know more about EXCESS">EXCESS</a> demand. This leads to competition among buyers, which raises the price. Increase in price leads to rise in supply and fall in demand. These changes continue till supply and demand become equal at a new equilibrium price. As there is a decrease in supply only, equilibrium <a href="https://interviewquestions.tuteehub.com/tag/quantity-1174212" style="font-weight:bold;" target="_blank" title="Click to know more about QUANTITY">QUANTITY</a> will fall, but equilibrium price will rise.</body></html>


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