In: Economics
suppose in the current year there is a nation wide
boom harvest for apple growers and a killer frost throughout
Florida. Which of the following statements correctly reflects the
subsequent developments in the U.S. orange market?
a. both equilibrium output and price will increase.
b. both equilibrium output and price will decrease
c. both equilibrium output and price may decrease.
d. Equilibrium output will decrease and price may decrease.
e. Equilibrium price will decrease and output may increase.
Apples and Oranges are considered substitutes in the given question. The demand for a good is influenced by many factors such as the price of substitutes, weather conditions, customer tastes and the like. Now, oranges are required to be picked up from trees before the freeze as they risk loosing their texture and juiciness. Oranges need to be protected from frost conditions. Apples, on the other hand, survive cold conditions much better due to dormancy; apart from loosing storage life, frozen apples are easily edible once thawed.
In the given question, the excessive frost is likely to affect orange production and lead to a fall in the supply of oranges. A decline in the supply of oranges will increase the price of oranges and decrease the quantity demanded. The supply of Apples, on the other hand , is also likely to be affected due to the frost. However, the boom in Apple production is likely to exert downward pressure on the price of Apples and as a result the prices of Apples will go down. As Oranges are considered substitutes for Apples, the decrease in the prices of Apples will keep the prices of Oranges from reaching a certain level, thus balancing the rise in prices of Oranges due to shortage (caused by frost ).
Accordingly option D seems to fit the above explanation.- equilibrium output will decrease and price may decrease.