Question

Suppose a technological improvement has lowered the cost of manufacturing cell phone batteries. This would lead to ___________ (a decrease OR an increase) in the supply of cell phones, causing the price of cell phones to __________ (Rise OR Fall). Because cell phones and landline telephones are __________ (complements OR substitutes), this hangs in price would cause the demand for landline telephones to __________(increase OR decrease). However, cell phones and cell phone applications are ___________ (compliments OR substitutes), so the change in the price of cell phones would ____________ (decrease OR increase) the demand for cell phone applications.

Answer 1

Answer:

The correct answer is: an increase; fall; substitutes; decrease; complements; increase.

Explanation:

Technological improvement has lowered the cost of producing cell phone batteries. This reduction in the cost of production will cause the price of cell phone batteries to decline. Since batteries are used as inputs in the cell phone. The reduction in the price of inputs means that the cost of production would decrease. The firms will be able to supply more at the same cost. The supply, as a result, will increase. The supply curve will shift to the right. The price of cell phones will decline.

Cell phones and landlines are substitutes. They can be used in place of each other. A decrease in the price of cell phones would cause the demand for landlines to decrease as the consumers will prefer a cheaper substitute.

The cell phones and applications, however, are use complements. They are used together. So when the price of cell phones decrease and its demand increase, the demand for cell phone applications will increase as well.