Which Of The Following Would Most Likely Cause Equilibrium Quantity And Price Of X To Rise?
1. Which of the following would most likely cause equilibrium quantity and price of x to rise?
(a) a fall in income when the income elasticity of demand for x is positive
Wrong. This will cause a drop in demand and thus a fall in quantity.
(b) a fall in the price of complementary product y
Correct. A fall in a complementary product will cause a rise in demand for that product “y” and thus a rise in demand of product “x” (see graph).
(c) a fall in the price of substitute product Z
Wrong. A fall in a substitute product will cause an increase in the demand for product Z and thus a fall in the demand for product x.
(d) an increase in the cost of producing x
Wrong. The increase in production cost will decrease supply (see graph).
(e) a fall in the price of product A which is jointly produced with x
Wrong. A fall in price of a jointly produced product will give the incentive to produce more A. If this incentivizes the producer to also increase the supply of x, the effect would be opposite as in (d): less price and more quantity.
2. Which of the following is not characteristic of a cartel situation?
(a) While disagreement over production quotas may occur, once set, there is little incentive for cheating.
Correct answer. In a cartel there are incentives to cheat (all other are characteristics of a cartel).
(b) There is an incentive for some producers not to join.
(c) Entry of new producers is a threat to the cartel's viability.
(d) Long-run demand elasticity can pose an obstacle to success.
(e) Output must be less than the competitive case for the cartel to be effective.
(a) a fall in income when the income elasticity of demand for x is positive
Wrong. This will cause a drop in demand and thus a fall in quantity.
(b) a fall in the price of complementary product y
Correct. A fall in a complementary product will cause a rise in demand for that product “y” and thus a rise in demand of product “x” (see graph).
(c) a fall in the price of substitute product Z
Wrong. A fall in a substitute product will cause an increase in the demand for product Z and thus a fall in the demand for product x.
(d) an increase in the cost of producing x
Wrong. The increase in production cost will decrease supply (see graph).
(e) a fall in the price of product A which is jointly produced with x
Wrong. A fall in price of a jointly produced product will give the incentive to produce more A. If this incentivizes the producer to also increase the supply of x, the effect would be opposite as in (d): less price and more quantity.
2. Which of the following is not characteristic of a cartel situation?
(a) While disagreement over production quotas may occur, once set, there is little incentive for cheating.
Correct answer. In a cartel there are incentives to cheat (all other are characteristics of a cartel).
(b) There is an incentive for some producers not to join.
(c) Entry of new producers is a threat to the cartel's viability.
(d) Long-run demand elasticity can pose an obstacle to success.
(e) Output must be less than the competitive case for the cartel to be effective.