Explain why input demand curves slope downward using the concepts of the factor substitution effect and the output effect
What will be an ideal response?
When the price of an input increases, the firm will substitute away from it toward other types of inputs. This is the factor substitution effect. Since the input is more expensive, the firm's costs will rise. Therefore, the firm will lower its level of production in the short run. This means that the firm will need to employ fewer units of all of the inputs it uses. This is the output effect. Both of these effects suggest that if the price of an input rises, the quantity of that input demanded will fall. This inverse relationship between the price of an input and its quantity demanded is represented by a downward sloping curve.
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Suppose the U.S. dollar gains strength against the euro (and against other major currencies). This strengthening of the dollar will cause which of the following to occur?
A) The aggregate demand curve will shift to the right and the short-run aggregate supply will shift to the right. B) The aggregate demand curve will shift to the left and the short-run aggregate supply will shift to the right. C) The aggregate demand curve will shift to the right and the short-run aggregate supply will shift to the left. D) the aggregate demand curve will shift to the left and the short-run aggregate supply will shift to the left.
One existing government program that works much like a negative income tax is the Earned Income Tax Credit
a. True b. False Indicate whether the statement is true or false
List the three reasons for why the aggregate-demand curve slopes downward
Which of the following would not cause the market supply of cell phones to change?
A.) Telecommunications are deregulated, and anyone can produce and sell cell phones. B.) A cheaper technology for producing cell phones is developed. C.) A reduction in the demand for cell phones causes the price to fall. D.) Taxes levied on cell phone production are reduced.