Assume that CDs are a normal good and that the price of stereo equipment falls while the labor costs of producing CDs increase. What will happen in the market for CDs?
What will be an ideal response?
Since stereo equipment is a complementary good to CDs, a decrease in the price of stereo equipment causes the demand for CDs to increase. The increase in labor costs causes the supply of CDs to decrease. The price of CDs will increase, but the quantity sold in the market could increase, decrease, or remain the same. The quantity effect depends on how much demand increased relative to how much supply decreased.
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A competitive firm's short-run supply curve is part of which of the following curves?
a. marginal revenue b. average variable cost c. average total cost d. marginal cost
An external effect that generates costs to a third party is called
a. free-ridership c. a negative externality b. a positive externality d. a marginal private cost