Question

In a world of two goods (x and y) technological improvement in the production of x will lead to

a) a fall in the relative price of x (Px/Py) but not necessarily an expansion of the industry

b) a fall in the relative price of x with a necessary expansion of the industry

c) an increase in the relative price of x with a necessary expansion of the industry

d) an increase in the relative price of x but not necessarily an expansion in the industry

Answer 1

Assuming that the two goods are substitutes of each other, technological improvement in the production of x will lead to a fall in the relative price of x with a necessary expansion of the industry. Technological improvement means that there will be more output of x with the same inputs. Same inputs would mean that the cost of production remains the same with an increase in the production of good x. As the cost of production per unit will fall so will the relative price of good x in the economy. With lower price the demand for good x will increase in the economy which will lead to a necessary expansion of industry.