Question

Can someone explain the effects of price due to changes of supply and demand of a product and its substitute by using the following scenario.

Scenario: Suppose that a freeze kills many orange trees in Florida but does not affect grapefruit trees in California. Grapefruit juice is a substitute for orange juice.

Question: What would happen to the equilibrium price and quantity of oranges?

A) Both the price and quantity of oranges increase.

B) Both the price and quantity of oranges decreases

C) The price of oranges increases and quantity of oranges decreases.

D) The price of oranges decreases and quantity of oranges increases.

E) Can't tell

F) None of the above

Question: Now, What would happen to the equilibrium price and quantity of orange juice? Now explain what happens to grapefruit?

A) Both the price and quantity of orange juice increase.

B) Both the price and quantity of orange juice decreases

C) The price of orange juice increases and quantity of orange juice decreases.

D) The price of orange juice decreases and quantity of orange juice increases.

E) Can't tell

F) None of the above

Answer 1

Answer : 1) The correct option is C.

Because of killing orange trees in Florida the market supply of oranges decreases which shifts the supply curve leftward. As a result the market price for oranges rises and market quantity of oranges decreases.

2) The correct option is C.

As price of orange raises and market quantity decreases because of killing orange trees, then obviously price of orange juice increase but quantity of orange juice decrease.

On the other hand, as grapefruit is the substitute fruit of orange fruit , the demand for grapefruit and grape juice increase as the price of orange increases which shift the demand curve to rightward for grapefruit and as freeze is not killing grape trees in California, the maket supply of grapefruit increase which shift the supply curve to rightward. Therefore, at equilibrium the price remains stable and quantity increases but quantity supply is depending on quantity demand in case of grapefruit and grape juice.