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?

Price of exercise bikes decreases and quantity sold remains the same.

Price of exercise bikes remains the same and quantity sold increases.

Price of exercise bikes increases and quantity sold also increases.

The change in price is ambiguous, but the quantity sold increases.

Answer 1

Answer:

Option (D) is correct.

Explanation:

The demand for exercise bike increases because people noticed the medical report published in a article which mention the benefits one can get from the exercise. So, this will shifts the demand curve for exercise bikes rightwards.

Simultaneously, the price of the parts needed to make bikes falls. We know that bike parts are the inputs for the production of exercise bikes. So, there is a reduction in the cost of input, this will lead to increase the supply of exercise bikes. Hence, the supply curve shifts rightwards.

Therefore, the equilibrium quantity of exercise bikes sold increases but the effect on the equilibrium price is ambiguous because its effect will be depend upon the magnitude of the shifts of demand and supply curve.