Question

Evaluate the statement: "The industry is sensitive to saying there is a shortage, as it implies there are not enough live trees to meet demand." Does this statement mean that the market for Christmas trees is in equilibrium?

What is the effect of a decreased supply of live Christmas trees on the prices of artificial trees? Does the answer depend on whether the artificial-tree producers anticipated the decreased supply in time to adjust their production (considering both short-run and long-run adjustments)?

What would cause larger trees to have a greater increase in equilibrium price than smaller trees?

Answer 1

NO, the statement doesn't mean that the market for the Christmas trees is in equilibrium but it suggests that the supply of live Christmas tree is in shortage and the demand is high i.e. there is a mismatch between the demand and supply of the live Christmas tree. In an equilibrium, the demand and supply of the trees would be equal.

Because of the decrease in the supply of live trees, the price of the artificial trees will also increase as they are a close substitute and people will demand more and more artificial trees. Increased demand will increase the price of the artificial tree.

Yes, the answer depends on the anticipation of artificial tree producer. If the tree producer anticipated the rise in demand for the artificial tree and increased their supply, in the short run they will increase the price of their product to meet the excess demand and in the long run, the supply will increase further to keep the prices of artificial trees down. So, the price will increase only in the short run and remain normal in the long run.

An increased demand for the large tree as compared to the small tree will cause a greater increase in the equilibrium price than the smaller tree. If people are demanding more of the large tree its price will go up and the price of the small tree will remain low.