Question

When the price of a capital good increases, what happens to the prices of related consumer goods and services? Why?

A.
prices increase due to the decrease in the supply of the capital good
B.
prices stay steady -- producers adjust by switching to another good
C.
prices increase due to the increase in production costs
D.
prices decrease because consumers decrease their purchases

Answer 1

Prices of consumer goods and services will increase due to the increase in production costs.

Answer: Option C

Step-by-step explanation:

The good which act as base for production of consumer goods are termed as capital goods. It includes machinery, raw materials, infrastructure etc. When the price of capital goods shots up, the price of consumer goods which are produced or manufactured using the capital good will also get increased.

Along with the price of the goods, the service related to the goods also increase. If the raw material required for production of paper increases, ultimately it leads to increase in the cost of paper.