Question

Suppose input costs _____ in the machine tool industry. This will cause the market supply of machine tools to increase, resulting in a _____ which will be eliminated as the market price of machine tools _____, everything else held constant.

Select one:

A. increase; shortage; increases

B. decrease; surplus; decreases

C. increase; shortage; decreases

D. increase; surplus; decreases

E. decrease; shortage; decreases

F. decrease; shortage; increases

G. decrease; surplus; increases

H. increase; surplus; increases

Answer 1

B. decrease; surplus; decreases

reason: When the input cost decreases, the cost of production decreases. So the producers earn more profit at the given price level. They now have greater incentive and increase the quantity of supply of machine tools. This creates a surplus of machine tools. Eventually, the price of machine tools will decrease (due to lowerr costs of production), and this will create more demand. So the surplus will be eliminated due to the decreased market price and the resulting increase in demand.