Use the following to answer questions :
Figure 3-2
-Let P* and Q* represent market clearing price and quantity, respectively.Given the supply and demand curves drawn in Figure 3-2, a reduction in the price of an input used in the production of Q will cause:
A)P* and Q* to climb.
B)P* to climb while Q* falls.
C)P* to climb while Q* holds steady.
D)P* to fall while Q* climbs.
E)P* and Q* to fall.

Question

Use the following to answer questions :
Figure 3-2 
-Let P* and Q* represent market clearing price and quantity, respectively.Given the supply and demand curves drawn in Figure 3-2, a reduction in the price of an input used in the production of Q will cause:
A)P* and Q* to climb. 
B)P* to climb while Q* falls. 
C)P* to climb while Q* holds steady. 
D)P* to fall while Q* climbs. 
E)P* and Q* to fall.

Quizplus · Accepted Answer

A reduction in the price of an input used in the production of Q will cause the supply curve to shift to the right, meaning that firms can produce more Q at every price level. This will lead to a decrease in the market price (P*) and an increase in the market quantity (Q*). Therefore, the best choice is D, where P* falls while Q* climbs.

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