Question

The price of peanuts increases. How does this affect the market for peanut butter?

Group of answer choices

The supply curve will shift the right. The price will rise.

The demand curve will shift to the right. The price will rise.

The supply curve will shift to the left. The price will rise.

Answer 1

Peanuts are used as input in production of peanut butter.

Change in cost of input changes the cost of production which results in a change in profit margin of firm. As profit margin changes, firm changes production of good and thereby supply of good changes.

When cost of input increases then cost of production increases. As cost of production increases, profit margin of firm decreases. This decrease in profit margin compels the firm to reduce production and thereby supply decreases.

On the other hand, when cost of input decreases then cost of production decreases. As cost of production dereases, profit margin of firm increases. This increase in profit margin compels the firm to increase production and thereby supply increases.

Since, peanut is used as input in production of peanut butter, an increase in price of peanut will increase the input cost for peanut butter producers. This will reduce the profit margin of such firms and would compel them to decrease production and thereby supply.

Thus,

The supply of peanut butter will decrease. This will shift the supply curve of peanut butter to the left.

Given the demand curve for peanut butter, this leftward shift of the supply curve of peanut butter will result in a rise in price of peanut butter.

Hence, the correct answer is the option (c) [The supply curve will shift to the left. The price will rise]