Question

There are large economies of scale in making flat

screen TVs, and there are also important

elements of learning by doing, as with most technologies.

a. Given that information, what would you expect to hap

pen to the price of flat

screen

TVs as the industry matures?

b.

In 2004, increasing the supply of flat

screen TVs was difficult, and the demand for flat

screen TVs increased faster than supply. Given this information, what would you have

predicted about the p

rice of flat

screen TVs in 2005?

c.

In 2005, a number of new plants for producing flat

screen TVs began production. What

likely happened to prices of flat

screen TVs in 2006?

Answer 1

a. Due to large economies of scale, and learning by doing as the industry matures, the price of flat screen TVs would decline. This is because cost of production becomes cheaper so price declines as the industry matures.

b. In 2004, demand for flat screen TVs increased much faster than supply or we can say that increase in demand was greater than increase in supply. So, we would have predicted the price of flat screen TVs to rise in 2005 due to greater demand than supply.

c. In 2006, as the supply of flat screen TVs increased due to new plants in 2005, the most likely effect on price is a decrease. Thus, as supply increases, price of flat screen TVs would decline in 2006.