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In a capitalist economy, if consumers' demand for cars rises while costs stay unchanged, the chain of events that increases car output runs through:
AHigher prices, smaller profits, then lower production
BLower prices, smaller profits, then greater production
CHigher prices, larger profits, then greater production
DCentral planners directing firms to expand output
Answer & Solution
Correct answer: C. Higher prices, larger profits, then greater production
1. A rise in demand for cars pushes their price up.
2. With costs constant, the higher price means larger profits.
3. Larger profits induce producers to expand car output.
4. A falling-price path reverses the demand effect, a shrinking-profit path contradicts the higher price, and a planner-directed path has no place in a market economy.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 1 Unit II "Basic Problems of an Economy and Role of Price Mechanism", p.3_
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