Which of the following events is most likely to increase the price of cell phones?
Select one:
a. A new law that prohibits the use of cell phone in all public buildings
b. A new study that discovers that using cell phones can cause brain cancer
c. Technological improvement in the production of cell phones
d. A fall in income
e. A fall in the number of cell phone suppliers
The correct answer and explanation is:
The correct answer is e. A fall in the number of cell phone suppliers.
When the number of suppliers in a market decreases, competition tends to diminish, which can result in higher prices. With fewer suppliers, consumers have fewer choices for purchasing cell phones. This reduced competition means that the remaining suppliers have more control over setting prices, which can lead to an increase in prices. In economics, this situation is known as a reduction in supply, which tends to push prices higher if demand remains the same.
Now, let’s examine the other options and why they would not likely increase the price of cell phones:
- a. A new law that prohibits the use of cell phones in all public buildings: This would reduce the demand for cell phones, as fewer people would need or want to own them for use in public spaces. A reduction in demand typically leads to a decrease in prices.
- b. A new study that discovers that using cell phones can cause brain cancer: This would likely reduce demand for cell phones, as consumers would become concerned about their health. Again, a reduction in demand would tend to lower prices.
- c. Technological improvement in the production of cell phones: Technological advancements that make production cheaper or more efficient usually lead to a decrease in production costs. If production becomes cheaper, firms may pass those savings on to consumers in the form of lower prices. Thus, technological improvement is more likely to reduce, not increase, prices.
- d. A fall in income: When income falls, consumers have less purchasing power. As a result, demand for non-essential goods, like cell phones, typically declines, leading to lower prices.
In conclusion, a fall in the number of suppliers creates a situation where fewer companies are offering cell phones, which can lead to higher prices due to reduced competition.