Question

A significant improvement in auto technology will: A. Shift the supply of cars out and to right, decreasing the equilibrium price of cars, but increasing the equilibrium quantity. B. Shift the demand for cars in and to the left, lowering the equilibrium price and quantity of cars. C. Shift the supply of cars in and to the left, increasing the equilibrium price of cars, but lowering the equilibrium quantity. D. Shift the supply of cars in and to the left, raising the equilibrium price and quantity of cars. E. Shift the demand for cars in and to the left, raising the equilibrium price of cars, but lowering the equilibrium price.

Answer 1

Answer:

A. Shift the supply of cars out and to right, decreasing the equilibrium price of cars, but increasing the equilibrium quantity.

Explanation:

The effect of technology on supply is that it will shift supply to the right. As cost of production reduces, producers can have more output at the same cost.

There will be excess supply (surplus), so customers will pay less for the product.

The equilibrium quantity will also increase as more cars are available in the market.

This is illustrated in the attached diagram. Equillibrum price reduces from P1 to P2. The equillibrum quantity increases from Q1 to Q2.

Government can influence cost of production through taxes, regulations and subsidies. Therefore they also influence shift of supply curve.