Question

Two events occur simultaneously in the market for automobiles: (1) an improvement in assembly line 'technology' and (2) the economy enters a 'recession' (which decreases 'income' of consumers). An economist would predict with certainty that (Points: 4)
a. equilibrium quantity will rise.
b. equilibrium quantity will fall.
c. equilibrium price will rise.
d. equilibrium price will fall.
e. the equilibrium price will remain the same.

Answer 1

Answer:

Option (d) is correct.

Explanation:

If there is an improvement in the technology then as a result the producers will be able to produce more quantity of automobiles with the same level of resources. This will increase the supply of automobiles and shift the supply curve rightwards.

At the same time, the economy is experiencing a recession. This will reduce the income of the consumers and hence, the demand for automobiles also decreases. This will lead to shift the demand curve leftwards.

As a result of these shifts in the demand and supply curve, the equilibrium price will fall and the impact on equilibrium quantity is indeterminate because it will be dependent upon the magnitude of the shift of demand and supply curve.