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Author Question: If the price of automobiles was to increase, then A) the quantity of gasoline demanded would ... (Read 55 times)

jjjetplane

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on: Jun 29, 2018
If the price of automobiles was to increase, then
 
  A) the quantity of gasoline demanded would decrease.
  B) the demand for gasoline would increase.
  C) the demand for gasoline would decrease.
  D) the supply of gasoline would increase.

Question 2

Suppose that the price of capital falls. Does this necessarily imply that the demand for laborwill fall? Explain.
 
  What will be an ideal response?
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mathjasmine

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Reply #1 on: Jun 29, 2018
Answer to Question 1

C

Answer to Question 2

No. If the price of capital falls, the factor substitution effect suggests that the firm will substitute away from the more expensive input (labor) toward the cheaper input (capital). This means that the demand for labor would in fact decrease. However, the decrease in the price of capital will also lower the cost of production, leading the firm to produce more. This is the output effect. If the firm produces more, it needs a larger level of all inputs including labor. This would cause an increase in the demand for labor. The full effect on the demand for labor depends on the relative sizes of the two effects.


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