When Henry Ford retooled his automobile production line for mass assembly, he dr

Question

When Henry Ford retooled his automobile production line for mass assembly, he dramatically increased the total cost of running his manufacturing operation. As the total production quantity went up by over 2,000% the average cost of each automobile Ford produced went down by half. In addition to employing thousands directly and indirectly, he increased wages for his workers. Ford s competitors continued to manufacture automobiles as they had prior to Ford s mass production effort. How did these events affect the market for automobiles? (Choose the 2 correct answers) The increase in production quantities of automobiles would cause a left shift in supply. Ford's competitors would benefit from the significant stimulation to the market caused by its increased production levels and economies of scale The falling prices for automobiles would cause a right shift in demand, increasing consumption. The falling prices for automobiles would cause an increase in the quantity demanded, increasing consumption. The increase in wages would cause a right shift in demand, increasing consumption. The increase in wages would cause a decrease in quantity demanded.

Explanation / Answer

1).

Now, as the production cost per unit decreases implied it increases the supply, => the price decreases and the quantity demanded increase. Similarly, as the demand increase leads to increase in the demand for labor, => that increase the wage, => here the correct answer are “D” and “E”.

2).

Now, as the market is close to perfect competition with free entry and exit, => if there is positive economic profit competitors can easily enter into the market and the total supply will increases and that will further lower the prices. So, here the correct answer is “D”.

3).

So, there are two players both of them have two possible strategies “Run the advertising” and “not to run the advertising”, => here for both of them the dominant strategy is “Run the advertising”, => both of them will does so, => no one will gain from advertising but have to bare the cost of it, => for “Beta” the profit will be “50,000-15,000=35,000”. Now, for “Acme” the profit will be “30,000-10,000=20,000”.

So, here the “Beta Donut’s” dominant strategy is to RUN the advertising campaign and they will earn “$35,000”. So, here the correct option is “D”.

4).

Now, for tragedy of common, as the hunters had no incentives to conserve the species, since other could not be trusted to hunt the pigeons responsibly, => the correct option is “A”.

5).

The local businesses simply don’t lower prices to compete with retailer because small store don’t have the economies of scale of massive online retailers, => the option is “D”.

6).

Free market can’t provide these public good because they are non-rival and equally available to all, => the correct option is “B”.

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