Question

Suppose a recent and widely circulated medical article reports new benefits of exercise. Simultaneously, the price of the parts needed to make bikes falls. What is the likely effect on the equilibrium price and quantity of exercise bikes sold?

Answer 1

Answer:

Equilibrium quantity increases; Equilibrium price is indeterminate.

Explanation:

If a new article reports that there are many benefits of exercise, this will increase the demand for exercise bikes and shifts the demand curve rightwards.

At the same time, there is a fall in the price of parts of exercise bikes which reduces the cost of production of exercise bikes. Now, the producer will be able to produce more exercise bikes, so the supply of exercise bikes increases and shifts the supply curve rightwards.

Therefore, there is an increase in the equilibrium quantity of exercise bikes and the impact on equilibrium price is indeterminate because that will be dependent upon the magnitude of the shift of demand and supply curve.