Chapter 2R, Problem 2MCQ

To determine

The question requires us to identify the factor which causes the supply of guitars to fall.

Explanation of Solution

The supply of guitars will fall due to the following reasons:

• A rise in input prices
• A fall in the price of substitutable goods and services
• Changes in technology
• Changes in consumers’ and producers’ expectations
• A fall in the number of producers

The first two options, an increase in guitar music popularity and a fall in consumer income will cause the demand for the guitar to change.

The next two options, the entry of new guitar-making firms and an increase in production efficiency will cause the supply of guitars to rise. In both cases, the production of the guitar will be higher.

The last option, an increase in wages of the guitar-makers will cause the supply of guitar to fall in the market because a higher wage will increase the input cost and results in higher costs of production along with lower profitability to the firms. 

So, higher input cost discourages the producer to produce less quantity of guitar and finally, the supply of guitar will fall in the market.

Thus, option “e” or ‘an increase in wage of guitar-makers’ is correct.