Chapter P2, Problem 1KC

To determine

 The reason behind the rightward shift in the demand curve.

Answer to Problem 1KC

Option 'b' is correct.

Explanation of Solution

The market is the place where the buyers and sellers interact with each other and the exchange of goods and services takes place between the two at a mutually agreed price level. The demand is done by the consumers, whereas the supply is done by sellers.

Option (b):

When the price of the auto insurance falls, it leads to an increase in the demand for the autos. This is because the auto insurance is mandatory for taking the auto and when the insurance price decreases, it increases the real money balance and causes a rightward shift in the demand curve. This means option 'b' is correct.

Option (a):

When everything else remains the same, an increase in the price of a commodity will lead to a decrease in the demand for the same. Thus, when the price falls here, the demand will increase but will lead to a movement along the same demand curve and not a shift. It means that option 'a' is incorrect.

Option (c):

The fall in the consumer income decreases the real income of the consumer and as a result, the demand curve will shift inward, and it will be depicted by a leftward shift in the demand curve. This indicates that option 'c' is also incorrect.

Option (d):

The fall in the price of steel would decrease the production cost of autos. When the cost of production decreases, the price will decrease making an increase in demand that leads to a movement along the same demand curve. Since the change in the price of steel causes a movement along the same curve and not a shift, option 'd' is incorrect.

Economics Concept Introduction

Market: The market is the place where the buyers and sellers interact with each other and the exchange of goods and services takes place between the two at a mutually agreed price level. The demand is done by the consumers, whereas the supply is done by sellers.